How to plan finances from Your First Job

Are you starting your first job? Earning your own money for the first time is overwhelming. Till the college years, we live by pocket money, however with the start of the first job, becoming financially independent would give you an adrenaline rush to splurge. And why not? You deserve a treat for yourself for achieving this milestone. 

However, the vital thing to start is to gain knowledge for better management of one’s finances. The earlier you get your hands into this, the happier and sorted your financial life will become in a few years.   

At first, the entire process would intimidate you, but you may be involved in a bit of trial-and-error to figure out what works for you.

Here are five things one should keep in mind to become financially independent:

1.Have a personal budget in place 

You can start preparing your monthly budget by listing the expenditure you will incur for essentials, leisure spend, travel, and savings. Essentials will include fixed costs like rent, grocery bills and utility payments, repayment of student loans, etc., which cannot be escaped. This budget should be based on the cash in hand salary after taxes, health insurance or contributions to retirement plans.

You can use the rule of 50/30/20 wherein not more than 50% of income should be allocated for living expenses, repayment of student loan or credit card can be 30 per cent, the remaining 20 per cent should be invested for short term and long term goals like higher education, travel, purchase of house etc.

2.Insurance policies and emergency fund

The first step towards a robust financial plan is to have health insurance covering the self and dependent family members. Once you have this in place, the next step is to build an emergency corpus. 

This fund should have at least 6-12 months of your basic expenses saved or invested. The purpose of this fund is for meeting any unforeseen emergencies like medical bills not covered by insurance, a sudden job loss or any other unexpected expense.

While investing for emergency corpus, one should keep in mind that the investment should be made in low-risk instruments offering stable returns with ease of liquidity.

3.Pay off any debts

In case you have any high-interest student loan or credit card debt, the next step is to pay it off as early as possible. It would help if you tried to curtail expenses that can be delayed and pay off the loan obligation first. If you take longer, then the loan interest will keep eating away your future savings. 

If you use credit cards, try to keep the credit limit as low as possible to avoid unnecessary spending. Credit cards can prove to be good if you benefit from the banks’ free credit period; however, if you overuse the limit or delay the overdue amount beyond the due date, you are inviting financial stress in your life. Try to keep yourself disciplined from the vicious cycle of debts and credit cards. 

4. Start saving for retirement.

You are surprised to read this. Or probably you just laughed out thinking that you just started your first job, and it’s a long way to go before you even think of your retirement! Right? If you are considering this, then it’s time that you educate yourself more about investing and understand how compounding works. 

To avail maximum return on your investment, you have to remain invested for an extended period. For this purpose, one should start investing for retirement as soon as they start earning. 

You can start small with a low investment of Rs 1,000 per month, but remember, consistency is essential. If you are eligible for PF contributions by your employer, you already get your salary after PF deductions. Apart from this, one should also have a stand-alone retirement fund.

5.Low Housing costs

Decisions to rent a house should be made wisely. Housing cost should not be more than 30% of your income. It is tough to stick to this deadline in metro cities, but one should try to optimise the housing by living with roommates or finding a suitable, cost-effective place. 

Everyone’s financial situation is different, and it takes time to develop a plan that fits your goals. As your career grows, your money will likely increase, too, which will boost your budget. 

Make sure you strike a balance between spending and saving. You should have a hold on your investments by educating yourself about financing and investing. A little effort from the start will also have a compounded effect on your financial health. 

Thanks for reading !