It is the most awaited SMS of the month, the one that immediately brings a smile on your face. You know what I am talking about. The harbinger of good news, the one that arrives on the 1st of the month with those magical words – Your salary has been credited!
That’s right. Whether you are a fresher or an old timer in the organisation, all of us look forward to that time of the month when our bank balances are finally high again. Albeit only for a few days, as more often than not, this high turns to a low by mid-month, and we begin the everyday countdown to the next pay check. In this crazy cycle of credit and splurge, how many of us actually have the prudence to take care of our money? Money is a fickle friend, and if not cared for properly during the heydays, debt and inflation could creep up on you when you least expect it.
Financial planning begins with understanding how to manage your salary. If you get that sorted, you are off to a great start already. Here’s FundsIndia’s Five-Part salary rule, a handy guideline to keep in mind if you are new to financial planning. It is a practical and easy way to divide your salary to 5 parts – each adding value to your life.
Living expenses: This is the major component that eats a big chunk into your salary and you should set aside a maximum of 50% towards this. This includes all the basic things that are necessary for your survival – such as house rent / EMI, food and grocery costs, electricity bills, phone bills etc. Ideally, your living expenses must not exceed 50%, and if it does, it is likely that you are living beyond your means. If you are spending lesser than 50%, great! Just divert the excess money towards the second component – Savings.
Savings: The most important component after your living expenses is your savings, for which you need to divert a minimum of 20% of your monthly pay. This has to be a mandatory component, as this is going to be your friend, both in times of uncertainties as well as to meet your future goals. Initially, it is wise to first build an emergency fund, which covers at least 3 – 4 months’ living expenses. This should be invested in an easily liquefiable financial instrument such as a savings account (secure, but will yield you a low rate of return) or liquid / debt mutual fund (low risk and likely to give you a higher return than a savings account). You must build the discipline to not touch this fund for anything other than an emergency.
Once that’s done, identify your short and long term financial goals and start investing your savings towards these goals. Fixed Deposits (FDs) are a common choice for investing your savings, but the FD interest rates have been going down for the past few years. Also, your returns from FD are taxable, therefore further bringing down your gains. On the other hand, mutual funds are one of the best places to invest in, as they offer you high returns and attractive tax-saving options, when compared to other instruments. Based on your goals, your financial advisor can help you identify the best funds that are secure and fetch you high returns.
Education: The third part of your salary should be set aside towards either your’s or your dependants’ education and should constitute at least 10% of your salary. It could be something you need in instalments, like a term fees every quarter, or something you are saving for the future. If it is for the future, this 10% should be invested smartly every month, thereby building a corpus for when the education expenses are needed.
Recreation: What’s life without a little fun? Set aside 10% of your salary towards your recreation. It could be for a vacation, or for a luxury purchase or something you have been meaning to spend on yourself. Whatever tickles your fancy! You could either spend it month on month, or save this for a bigger spend later in the year. But this component is truly for you.
Insurance: The last 10% of your salary should be set aside towards insuring you and other dependants in your family. Don’t just stop with thinking about life insurance. Analyse your family’s needs and whether you need medical insurance for you and senior dependants. Insurance should not be looked at as an investment. It is an important expense that offers you and your family protection in case any calamity should befall. The thumb rule is that your life insurance cover should be about 100 times your gross monthly salary. Identify a good term plan (preferably online as they are cheaper), which offers you optimum coverage and use this 10% to meet the expense.
So there you go; the five golden rules on how to get the most from your salary. Get started with these and you are on the right track towards building a financially secure future. If you need help getting started with your investments, just log onto www.fundsindia.com and open your free-for-life account. You can begin investing instantly with our pioneering robo-advisory service Money Mitr, or you can speak to our expert financial advisors and kick-start your investment journey.
Happy saving, happy spending, happy living!