I have just started earning and do not know a lot of finance. What now?
Part 1: As someone who is new to investing and started earning, what should I do with my money?
I have just started earning and do not know a lot of finance. What now?
Posted on 28 Mar 2021
Author: Sayan Sircar
Tags: 
Basics
4 mins read
Basics
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Part 1: As someone who is new to investing and started earning, what should I do with my money?
Click to read the other parts:
- Part 1: this post
- Part 2: As someone who has heard about goal-based investing, how do I get started?
- Part 3: I am now ready to do goal-based investing, how do I get started?
First of all, a big Congratulations is due for having finally completed studies and landed a job that pays you money. After all the 15-17+ years spent in education have brought you to this point and it is a big achievement.
📚 Topics covered:
- Basic money equation 1: Savings = Income - Expenditure
- Basic money equation 2: Income = Expenses + Investments
Basic money equation 1: Savings = Income - Expenditure
Annual income twenty pounds, annual expenditure nineteen nineteen and six , result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery - Charles Dickens
This is the most fundamental point: you earn money to spend it. The amount to spend is lower than the income. Whatever you do not spend this month goes into savings and the simplest place to save the money in your savings account - can be the same one you receive your salary. This also gives you a small amount of interest every quarter, around 3% or 30 rupees for every 1000 per year. This is not a lot (and you pay taxes on it) but it is good to get started.
This also leads to the first corollary of the money equation 1:
Corollary 1: If Expenditure > Income, then you have to rely on savings. This is also simple enough. If you earn 40,000 a month and have spent 35,000 on an average then per month you have saved 5,000. So after 6 months if you need to buy a 25,000 mobile phone then that comes out of your savings. So far so good.
This also leads to the next money equation: if you want to spend a lot of money, you need to save (let’s call that Investment) for it.
Basic money equation 2: Income = Expenses + Investments
Expenses
To get started on the first steps and DOs and DON’Ts, have a look at this detailed post.
Expenses and debt payment is managed via the concept of budgeting. Since this is a large topic please refer to these three posts which cover this in detail:
- Budgeting superpower - pay-yourself-first
- How to manage to save and invest as a freelancer or professional
- How to pay off debt
Investments
This is the second term of the money equation and deals with how you scale savings in case you have a large amount to be spent on a future date? A few examples are
- a two-wheeler purchase 9 months from now costing 50,000 today
- a trip with friends a year from now that costs 40,000 today
- fees for a 200,000 course (PG/MBA possibly) 2 years from now
All of these are called financial goals and they have 3 main parts to each: the purpose, the horizon and the cost today:
| Purpose | Horizon | Cost today |
|---|---|---|
| Two wheeler | 9 months | 50,000 |
| Trip | 1 year | 40,000 |
| Course | 2 years | 200,000 |
There can be bigger and longer goals as well like these:
| Purpose | Horizon | Cost today |
|---|---|---|
| Dream vacation | 3 years | 3 lakhs |
| Buy a car | 5 years | 8 lakhs |
| Buy a house | 8 years | 20 lakhs |
This is all done via Investments and since each investment is for a goal it is called “Goal-Based Investments”
If you have heard of mutual funds, stock markets, FD/RD, Provident Fund, Insurance and tax-saving - all of these will be covered next.
- Part 2 of the series: Part 2: As someone who has heard about goal-based investing, how do I get started?.
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