Earning income is not enough, investing and rerouting such money is most important. New professionals are mostly in the range of 20s. This is just the beginning of personal finance and if better financial planning is carried out at this phase, it would yield amazing results. This article will show how the young professionals who have just started their careers, should handle their personal financial planning.
Early bird catches the worm
Once you join any employment, you would be so overjoyed that you would first start spending. Well, I guess part of the money is surely for spending, but make sure that you save more than you spend.
This is very important because there are very few responsibilities at this age because there are no commitments at such early age with respect to kids, marriage, etc. To understand the fact of compounding, that saving now inappropriate instruments will double or even triple your initial investment.
However, it is better to consult your financial advisor to identify the appropriate saving routes like mutual funds, insurance, etc.
While most employers offer group health insurance benefits to employees, such cover may be inadequate. Most of the employees are laid back when it comes to health insurance, because of this group benefit. However, it may be necessary to evaluate this scheme to understand the various factors as follows.
- Coverage with respect to preexisting diseases
- Sum assured
- Settlement procedures
- Third party settlement facility
- Hospitalization expenses
- Network of hospitals
- Limit for settlement, etc.
Hence, opting for reasonable health insurance will be better to afford medical treatment for you and your family. It secures you in case of any unfortunate incidents.
Dream house and tax savings
Most of the employees, who are relocated to different towns may opt for rentals. However, if any employee purchase house, then he is eligible for claiming the deduction for interest on a housing loan from his salary income. This budget increase in the housing loan interest limit on a Self Occupied Property to Rs.200000 and additional deduction for Rs.50000, where a loan is Rs. 35 – 50 lakh.
Even in cases, where your developer or builder is delaying the possession time limit, you would still be eligible to claim interest on a housing loan. The Finance Minister has raised the time limit to 5 years for claiming Pre-Construction interest on Housing Loan. This allows us to avail deduction for interest on housing loan (for prescribed limit), even if he has not received possession of his home.
File your returns
The current year budget has announced that return filing is compulsory even if your income crosses the threshold before claiming exempt income of Long Term Capital Gains (LTCG) on equity shares.
So if have not filed your return based on the fact that your LTCG on shares was exempt and other income was not crossing the threshold, this is the wake-up call. You have to file returns if your income before claiming exempt income exceeds the threshold.
Inflation is the force that eats up most of your disposable income. Let’s elaborate on the concept of inflation with an example. Suppose, you have invested Rs.10000 in bonds that have a 10% coupon rate. You expect to receive Rs.1000 as interest every year. But what is the real value of such interest income? The real Value of Money refers to income after considering the effect of inflation. This is because Rupee 1 received in the year 2015 would not be equal to Rupee 1 received in the year 2020. Rupee 1 in the year 2015 will be more than Rupee 1 to be received in the year 2020. This diminishing effect is known as inflation.
So considering this fact, if we assume an inflation rate of 5%, then the real rate of interest would be 5% (10%-5%). So, you will be getting a real income of only Rs.500.So plan your investment portfolio considering that returns on your investment will be reduced to the extent of the inflation rate.
Any borrower is checked for a clean credit score on the credit rating agency website. So, if you are planning to avail loan facility for house purchases or car, etc., then you may need to have better credit score.
For a better credit score, you need to wipe off other loans like installment purchases, etc., which may reduce the disposable income. This will need you to pay off your debts in lump sum.
This step will not only improve your credit score but will also avoid unnecessary borrowing for futile purposes which won’t create any asset like vacation planning, etc.
Now that we talked about health insurance, we got to talk about term insurance policy. This will protect your dependents in case of any unfortunate situations like accidents or much worse death. You need to verify each term and clause from a trusted insurance representative about the sum assured, pension assured, premium, coverage term, etc.
However, don’t get stuck in unnecessary insurance policies so as to save tax. You need to look at insurance as a protection measure first and after that look at tax saving.
Beware of the tips of insiders
You may be having demat account, which you may be operating on the basis of tips given by your brokers. This system is highly risky considering the high magnitude of risk and reward ratio.
Any stock is to be selected on the basis of fundamental analysis. This would involve monitoring its past performance, its financial vital stats like PE (Price Earnings) ratio or beta (used for evaluating volatility as compared to market movement), etc.
Floating of emergency fund
Emergency Fund is your last resort when you don’t have any other source to fund your expenses, in case of sudden job loss or pay cut, etc. You must maintain such emergency reserve which should be easy to access in case of any unforeseen events.
Do not keep all your eggs in one basket, tells the old tale. Correct, if you ask me. When you invest in one sector or instrument or stock, you have high risk which is inherent risk for it. So diversify your investment to achieve balanced returns and reduced risk in your portfolio.
You may be tempted to live a luxurious life by spending more on unnecessary consumer goods. However, it is imperative to carry out financial planning to ensure that you have a safe post retirement life.
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