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Young earner series - DOs and DON'Ts

Posted on 20 Jun 2021
Author: Sayan Sircar

Tags: Budgeting

6 mins read
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Young earners can follow these basic steps to start saving and investing.

Young earner series - DOs and DON'Ts

The DOs

Bank Account

You need two bank accounts

salary account to receive salary and other income (from freelancing as an example)
investment account for savings and investments

Choose a bank account with good Netbanking, ATM access and easy to use smartphone apps. One good banking feature to look for is “sweep FDs” where the money in an account automatically becomes a fixed deposit with slightly higher interest than savings a/c. Sweep FDs is good for keeping your emergency and sinking funds. Choose well known and big banks like SBI/ICICI/HDFC if you are holding a lot of money in cash or FD/RD.

The salary account is for all monthly expenses (rent, utilities, food, clothing, commute and entertainment) and bill-payment (mobile, internet, electricity, credit card, streaming services etc.). This account will hold some account of cash for day-to-day expenses.

Transfer the money remaining in the salary account to the investment account for

emergency fund via cash balance and recurring deposit (RD)
sinking fund via RD
monthly investments in stocks and mutual fund (via SIP)
receiving money from sales of stocks and MF
payment of large amounts like insurance premiums (term life, health, vehicle) and miscellaneous items like travel, gadget purchases etc. that come out of the sinking fund

Do not forget to register nominees (someone to get the money if you die) in all bank accounts, mutual funds and demat accounts.

Credit Card

In your primary bank, create an FD and get a credit card against that FD. For example, a ₹25,000 FD will get you a card with ₹20,000 limit. The purpose of a credit card is for building a credit history which is essential for getting a loan (car/home etc.) at cheap interest rates.

Ensure you pay off the bill in full every month. Credit card points are not significant at this stage unless you are spending large amounts via your card.

Savings funds

Use the investment bank account to create a

emergency fund with 6-12 times monthly (expenses + EMI) for contingencies like job loss, hospitalization, emergency travel and repairs
sinking fund for annual recurring expenses

Expense tracking

Create a habit to track expenses via apps like Hello Expense, YNAB, or anything (even a spreadsheet or physical diary) that allows you to note down expenditures as you make them. Use the Pareto principle (ensure that the biggest spends and recurring smaller spends are both captured). This way, it is not necessary to track every rupee spent. The target here is to be more or less accurate regarding your estimated and actual spending.

Prioritize your spending on things that are important to you. For example, if you like to travel and going out with friends but indifferent to designer clothes, then allocate a good chunk of your budget to the first two and a smaller amount to the rest.

The DON’Ts

Keeping unpaid balance in credit card

A credit card is not a source of free money. Missing a payment or not paying off the complete balance will cost you a lot of interest. Build up the emergency fund first instead of frequently using a credit card. A large credit card or personal loan taken for fun (and non-emergency) expenses will create a hole that will take years to get out of.

Day trading

Trading stocks, crypto and Futures-and-options (FnO) is an expensive hobby and is not a source of income for most people. It is easy to find social media posts that show how effortless it is to make money in trading. If you want to “try your hand”, then ensure

that you understand the risks (for example, option selling is not a source of risk-free income)
only invest as much money as you are willing to lose

Use tax saving as a justification for investments

Poor financial investments such as

large investments in PPF for 80C tax benefit
buying a house for investment for a tax deduction will lock up large amounts of capital in assets that do not beat inflation.

Make investments as per goals and not for saving tax. Many tax-saving investments require you to spend 100 rupees to save 30 rupees tax which does not make sense.

If you need to buy a house, ensure that you are planning to live in it for at least 10 years to justify the hit to your investment ability.

Buying things on EMI

If you need to make a big-ticket purchase try using the sinking fund to save for it instead of putting it on a credit card EMI plan. Even zero-cost EMIs have hidden charges.

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KNOW

Calculate your hourly wage which is Monthly salary / Hours Per Day / 30

For everything that you buy, know how much it cost in hours worked to give you an idea of the cost of things that you buy. This topic is covered in more detail here:

How long does it take to earn what we spend on?

DREAM BIG

Set your goals to save for them:

Foreign MBA
Europe trip with family
Road trip with friends

Start goal-based investing for all of these and the money will be there when you need it.

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Asset Allocation (21) Basics (8) Behaviour (12) Budgeting (12) Calculator (25) Case Study (6) Children (17) Choosing Investments (40) FAQ (12) FIRE (13) Gold (21) Health Insurance (5) House Purchase (29) Insurance (16) International Investing (12) Life Stages (2) Loans (17) Market Data (7) Market Movements (16) Mutual Funds (46) NPS (7) NRI (19) News (18) Pension (8) Portfolio Construction (52) Portfolio Review (27) Reader Questions (8) Real Estate (7) Research (5) Retirement (38) Review (15) Risk (6) Safe Withdrawal Rate (5) Set Goals (28) Step by step (15) Tax (59)

Next steps:

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