Congratulations! Your hard work has paid off. You have landed a decent first job. What are a few things you can do right away to make your future financially brighter? Here are five tips.
1. Pay off debt
If you have taken a student loan or have debt of any kind, your first priority should be to pay it up. For the student loan, inform the bank or the financial institution about your employment and complete any formalities they might have. Set up a standing instruction to deduct a fixed amount from your bank account every month towards debt repayment. Set the date for this payment closest to your salary so that you don’t spend the money before the due date.
Bonus points if you are able to allocate more than the specified EMI, as your loan will be cleared faster. For example, a ₹5-lakh loan with an interest rate of 11 per cent per year, payable in ten years, would mean an outgo of approximately ₹6,887 per month. If you were to pay ₹1,000 extra each month, your loan will be over in eight years! Prompt repayment helps you build a stellar credit score right at the start of your career.
2. Start a PPF account
A Public Provident Fund is a government-sponsored savings product with EEE (exempt-exempt-exempt) benefits. This means that the amount you invest, the interest you earn and the withdrawals you make are all tax-free. The minimum yearly deposit is ₹500. The restriction that you can invest in PPF only 12 times a year was recently removed. Therefore, you can invest any number of times in a financial year, subject to a maximum of ₹1.50 lakh. At present, the PPF account offers an interest rate of 7.9 per cent per year. A loan facility is available from the fourth year of opening a PPF account, while withdrawals are allowed only after six years.
3. Buy a term insurance plan
A pure term plan gives you basic life insurance. At a younger age, the premium required will be lower. For a 25-year-old non-smoker male, for a policy term of 30 years, the annual premium for a sum assured of ₹1 crore comes to approximately ₹7,000. For a non-smoker female of the same age, this would be around ₹6,300.
Most insurance companies let you go for a top-up option such that your cover increases with income and age. Aim to cover at least 12-15 times your annual income. Additionally, term insurance plans offer added benefits for a small increase in premium. These are called ‘riders’ and are usually for critical illness or TPD (total or partial disability). With these riders, insurers offer additional protection in the case of serious illnesses and will even pay the remaining premiums on your behalf in the event of an unfortunate incident.
4. Start an SIP (or two)
Systematic investment plans are an excellent way to invest in companies and build wealth over time. Starting early helps you draw the full benefit of compounding. Compounding allows time to grow your money. The interest earned is reinvested each year and hence accumulates. By investing in SIPs, you reap the benefit of rupee cost averaging. Let us consider a simple example. You invest in a monthly SIP of ₹1,000. Let’s assume the fund’s net asset value (NAV, or its price per unit on that day) was ₹25. You would then get 40 units. Suppose, the next month the fund’s NAV rises to ₹28.50, you would get 35.08 units. For the third month, let the NAV be ₹27, you would then get 37.03 units.
Average cost incurred would be ₹3,000/112.11 = ₹26.75
Average price = Sum of all NAVs/time = 80.50/3 = ₹26.83.
The longer the horizon of investment, the average cost will be less than the average price paid. This will help you accumulate better returns by buying units at lower cost. By investing at a fixed time each month, you reduce the risk of attempting to time the market. For beginners, it would be good to invest in index mutual funds that mirror the performance of a particular index and have a passive investment nature.
5. Start an NPS account
The Pension Fund Regulatory Development Authority (PFRDA, www.pfrda.org.in ) provides a new pension scheme for the government, corporate and unorganised sectors. With an impressive array of eight fund managers and the option to decide on the mode of investment (equity, debt or government securities), NPS provides an excellent avenue to start building a retirement corpus.
Each day counts, so start saving early and your future self will thank you!
( The writer is a Fellow at IIM Tiruchirappalli and an Officer with State Bank of India. The views are personal.)