Arthgyaan

Supporting everyone's personal finance journey

Young earner series: DOs and DON'Ts

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

Young earner series: DOs and DON'Ts


20 Jun 2021 - Contact Sayan Sircar
5 mins read

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

Young earner series: DOs and DON'Ts

Table of Contents

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.

Recent articles:
1 / 3
<p>This article shows a way to decide what to do when stock markets reach all-time or lifetime highs. Should investors buy more or sell to book profits?</p>
The stock market has reached an all-time high. Should you buy or sell?
2 / 3
<p>This article uses the Arthgyaan Have vs Needs Framework to invest a large lump sum amount in your portfolio per your financial goals.</p>
How to invest a lump sum amount for your goals?
3 / 3
<p>This article shows you how the concept of indexation lowers the capital gains tax you pay when you sell debt mutual funds.</p>
Pay lower capital gains taxes for debt mutual funds: understand how indexation works

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.

Related:
Inflation: the impact on your goals and how to choose assets that beat it

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.


Goal-based-investing plan

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.

If you liked this article, consider subscribing to new posts by email by filling the form below.

Worked out case studies for goal-based investing

Previous and next articles:

<p>We discuss the two common debt payment methods that exist which can be used to easily pay off multiple loans: the avalanche and snowball methods.</p>
Loans
Which debt to pay off when you have more than one loan?

We discuss the two common debt payment methods that exist which can be used to easily pay off multiple loans: the avalanche and snowball methods.

Published: 19 June 2021

5 MIN READ


<p>Use the bucket theory of asset allocation to create a simple and stress-free retirement portfolio.</p>
Retirement
How to plan for retirement using the bucket approach?

Use the bucket theory of asset allocation to create a simple and stress-free retirement portfolio.

Published: 21 June 2021

6 MIN READ


Latest articles:

<p>This article shows the effect of postponing early retirement by just a little since it allows you to spend more in retirement.</p>
FIRE
FIRE journey in India: what happens if you work just a bit longer

This article shows the effect of postponing early retirement by just a little since it allows you to spend more in retirement.

Published: 4 December 2022

2 MIN READ


<p>This article shows a way to decide what to do when stock markets reach all-time or lifetime highs. Should investors buy more or sell to book profits?</p>
Market Movements
The stock market has reached an all-time high. Should you buy or sell?

This article shows a way to decide what to do when stock markets reach all-time or lifetime highs. Should investors buy more or sell to book profits?

Published: 30 November 2022

4 MIN READ


Topics you will like:

Asset Allocation (17) Basics (8) Behaviour (10) Budgeting (9) Calculator (13) Case Study (3) Children (9) Choosing Investments (28) FAQ (3) FIRE (10) Gold (6) Health Insurance (4) House Purchase (13) Insurance (12) International Investing (8) Life Stages (2) Loans (10) Market Movements (8) Mutual Funds (14) NPS (5) NRI (4) News (5) Pension (6) Portfolio Construction (36) Portfolio Review (22) Retirement (29) Review (7) Risk (6) Safe Withdrawal Rate (5) Set Goals (26) Step by step (8) Tax (16)

Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself
OR
use this quick and fast online calculator to find out the SIP amount and asset allocation for your goals.

Don't forget to share this article on WhatsApp or Twitter or post this to Facebook.

Discuss this post with us via Facebook or get regular bite-sized updates on Twitter.

More posts...

Disclaimer: Content on this site is for educational purpose only and is not financial advice. Nothing on this site should be construed as an offer or recommendation to buy/sell any financial product or service. Please consult a registered investment advisor before making any investments.

This post titled Young earner series: DOs and DON'Ts first appeared on 20 Jun 2021 at https://arthgyaan.com


We are currently at 206 posts and growing fast. Search this site:
Copyright © 2021-2022 Arthgyaan.com. All rights reserved.