FINANCE SPECIAL.. Six money facts for new income earners

Here’s what you should know about managing money if you want to optimise its usage, says


    It is the season of the young taking up their first job assignment. The first pay cheque starts the journey into the world of personal finance. Here are six pointers to help you in this exciting, sometimes stressful, journey with money.

    First, managing money is primarily about cash flow. The income earned comprises the inflow and the expenses incurred constitute the outflow. Both these do not match in time or amount, and worse, remain unpredictable for most part. While a gift for your mom will fit into your first pay cheque, the car you wanted to buy may not. You may spend happily in the early days of the month, but an unexpected trip to your home town may leave you seeking hand loans at the end of the month. Making a monthly budget is an obsolete art. A simpler option is to list out and pay off all mandatory expenses, such as the education loan, rent, phone bill, among others, as soon as the cash comes in. What remains is relatively easy to manage even if you decide to stay at home the last weekend since you exhausted the cash. Separating the routine from the unexpected is a good skill to acquire.

    Second, learn to think of cash as a limited resource with multiple uses. There is always an alternative use you can put your money to. Think about it when you allocate cash. Spending comes with a happiness quotient and the independence of financial decision-making gives everyone a high. Being too conservative makes you worry that you are not enjoying your earning; spending too much leads to guilt of not being careful with money. A simpler way to deal with this problem is to have a mental budget that is represented as a percentage of your monthly income. This gives you a good sense of how you apportion your money. You may like to think that 10% should be used for going out with friends; 15% for your clothes and grooming; 10% for books and movies; 40% for running your home, and so on. This helps to view your spending in relation to your income, and you will know when you cross the line.

    Third, money grows in value over time, if invested. The basic math to know when you deal with money is that a rupee invested today will gain in value and be worth so much more in the future. Therefore, leaving money undeployed erodes its worth. When you allocate your income, pay yourself first. A 10-20% allocation to saving and investing means that this amount, which you leave untouched in an investment, grows in value with time and you build an asset. Building assets can help you manage your future cash needs better. Your ability to manage any risk to your income from job changes, or your need to part-fund a higher education, or your ability to take a break to raise a family, all depend on how much you have accumulated as investment and assets. You can derive an income from your assets, sell when in need, offer them as collateral for loans, liquidate partially or offer as guarantee.

    Fourth, align your money decisions to your specific situation before making choices. Buying a house might save you the rent, but you pay an EMI, which can be burdensome if your job is risky. If you relocate for better career opportunities, you will find it a problem to fund the EMI and live in a new city. If you plan to get married soon, taking on a car loan, home loan and personal loan, all in short succession, will leave you with little to spend on your spouse and yourself in the early days of courtship. If you have just started earning and have no dependants, you may not need insurance. Don’t commit to a large premium just to save tax and expect to compulsorily save an amount you may find tough to sustain. Begin with simple bank term deposits, buy a few tax-saving bonds and deposits, then a few mutual funds, and open a PPF account. Once your investments have grown to cover at least 2-3 years of your annual income, you are ready for illiquid, large assets, such as a house. If you cannot stop yourself from speculating in the stock market, ensure you have staked only a small percentage that can’t hurt you.

    Fifth, get familiar with operational and legal processes associated with money. Your relationship with your bank is critical when you need a loan, so don’t fritter it away by forgetting to pay a credit card bill. Understand you tax obligations and deadlines.

    Get help with your accounts if you are a working professional with limited time, and complete your registrations, returns and paperwork in time. Ensure you have kept records of your income, investments and bank statements. Good housekeeping is a great help if you need to raise funds at short

    notice or explain your assets to the taxman.

    Keep your address, phone number and email updated with your bank and other service providers. Take the time to understand the Internet, phone and mobile security for financial transactions. Several tutorials are available on the Internet for these simple tasks.

    Sixth, personal finance is as the term suggests—personal. Your money habits are driven by your cultural context, upbringing, personal values and preferences. Understand and accept the kind of person you are when it comes to money. You may be generous or stingy, meticulous or careless, honest or dishonest. How you deal with money will be driven by different motivations. It is a good habit to keep emotion out of money decisions. When you lend to a friend, more often than not, you lose both money and friendship. There are hand loans that are tough to recover. There are expenses that may be difficult to avoid. Make sure you are not using money to acquire popularity, acceptance and love. These are difficult to sustain and seldom last. Learn to be discrete with your money; it is yours and you should always retain the freedom to decide how, when and how much of it you will use.

Uma Shashikant. ET 120409