If you have recently started earning, or are new to managing your personal finance, this post is for you. I remember how clueless I was about managing my money 10 years ago when I started earning. Since then I have learned a lot of tips and made a few mistakes on the way. Through this post, I hope to share my learnings so that you can benefit from it and manage your personal finance smartly.
1) First Save, Then Spend.
A lot of people approach savings as:
Savings = Income – Expenditure
However, the correct way to approach it is
Expenditure = Income – Savings
There are a few necessary recurring expenditure that you will have to take care of, such as:
- Room Rent, Electricity, Maintenance etc
- Internet Bill
- Phone bill (keep it to a minimum)
Every month when you get your salary, take out the portion required for these necessary expenditures. Save a part of whatever is left and only then spend the remaining amount.
In fact, instead of saving a random amount every month, decide a fixed amount that you will be saving. Treat your monthly savings goal like a bill. At the beginning of the month hold yourself accountable to pay it off like you would your rent or EMIs. This will instill a sense of discipline.
2) Do Not Mix Insurance & Investment
When you start earning a lot of Insurance agents will reach out to you and try to sell you products which give the benefit of Insurance as well as “good” maturity amount. These are called ULIP (Unit Linked Insurance Plan). Just run away from them. As fast as you can.
Why do I say so?
ULIP gives customers both insurance and investment under one plan. While this may sound like best of both the worlds, in reality, it is not. ULIPs actually do a bad job at both insurance and investment.
- If you compare the return of ULIPs against Equity Mutual Funds you will find that Mutual Funds outperform ULIPs by a considerable margin.
- If you compare the premium that you pay for ULIP with that of a Term Insurance Plan, you will find that premium for ULIPs are many times higher than that of a Term Insurance.
Term Insurance is a pure Insurance product with no maturity value. If something bad happens to you your dependent gets the maturity amount, otherwise, you don’t get anything back when your policy expires.
Though Term Insurance plan won’t give you anything at the end of maturity, the premium that you pay for Term Insurance plan is much lesser than for ULIPs (think 4K vs 40K per annum). You can get a better return by investing that difference in some good investment plans.
So, just keep in mind that insurance is not an investment product. Insurance is bought to provide financial security to your dependents should something happen to you. So, if you have dependent family members, buy a term insurance policy for yourself.
Note that if you buy insurance at an early age, your yearly premium will be very less.
Another advantage: you can claim tax benefits on the premium that you pay.
3) Buy Medical Insurance
A lot of companies these days provide a family floater health cover to employees, which covers your entire family. So, people don’t see a need to buy separate medical insurance. But take my advise and buy one for yourself and your family even if your family is covered by your company’s medical policy.
Five reasons for that:
- It is cheaper & easier to get medical insurance when you are young.
- If you were to leave your job and join a company that doesn’t provide medical cover, you will be at risk of paying everything from your pocket should something unfortunate happen.
- If you purchase medical insurance early and at a later stage in life you get diagnosed with some ailment, you would have already passed the waiting period criteria that most medical insurance policies come with and so your claim will not get rejected.
- Most medical insurance policies have 2-4 years of a waiting period for pre-existing diseases. By purchasing a policy early in your life, when you are already covered by your organization, you can easily pass the waiting period on your personal policy by using company policy for such cases. In the future, if you don’t have your company cover, you will not be left to hang dry should you or a family member get hospitalized for the pre-existing disease.
- After your retirement, you wouldn’t have to rely on your children to take care of your medical emergencies.
Additional benefit: you can claim tax benefits on the premium that you paid.
4) Maintain a Contingency Fund
Have at least 6 months of your monthly salary in a savings account or a liquid mutual fund (with very low risk). This is your emergency fund so you don’t want to put it in any risky investment instruments. Keep this in a separate bank account – not your salary account – and preferably one that offers a high interest rate (e.g. DBS bank) or sweep-in facility. Don’t keep its ATM card in your wallet.
God forbidding if you lose your job, or decide to leave it for some reason, you can survive for 6 months maintaining the same lifestyle while looking for a new job.
Don’t touch this bank account. Use it only in case of dire emergencies. And refill it as soon as you can.
5) Don’t Take Loans for Depreciating Assets
As far as possible, avoid taking loans for depreciating assets. Depreciating assets are the assets that lose their value over time, like a car, bike, tv, fridge, etc. Don’t purchase these things to show off your wealth. Purchase what you need and what you can afford without taking a loan.
And seriously why do you want to purchase a swanky car and be stuck in traffic for hours when you can car-pool, take an Uber, metro or any other public transport? If you do a little math before purchasing a car you will realize that in most of the cases taking a cab or carpooling is a more economical option.
So, if you should not take loans for depreciating assets, how should you buy them?
We’ll find the answer to this and go through a few more tips in the second part of this article. Do check that out. And let me know what you think about these tips.
When not writing blogs, Anshul could be found working on interesting data analytics problems at Uber. Though he does not have a degree in finance – he holds a B.Tech degree from NIT Jaipur – his interest in the field has made him learn the nuances of personal finance management.