Planning your finances early

The first job for any individual marks a turning point in his life. The first paycheck acts as a gateway to new opportunities and of course, financial independence.

It could also mean preparing to shoulder responsibilities, if your family budget is in need of augmentation.

Even if you are not required to contribute, you still owe it to yourself to handle your finances with care.

Below are some of the steps, which you must take to ensure financial independence:

1. Insure yourself
The first thing that you need to look at once you get your salary is insurance — for yourself as well as your dependents. You should opt for a term life insurance cover now that you have a steady stream of income. If you buy a life insurance cover at a young age, you will have to pay lower premiums. The value of the cover can be 10 times your annual cost-to-company (CTC). Life insurance premium paid is eligible for tax deduction under Section 80 C, but protection, and not tax benefits, should be the criterion for taking such decisions.

However, there is no need to get a life insurance policy in the first year of work-life if you have no dependents. You would be better off acquiring a mediclaim with a cover of Rs 3 lakh-5 lakh. Even if your organization offers a health insurance cover, it would still be worthwhile to sign up for a standalone insurance policy. In addition, you can claim a deduction of up to Rs 15,000 under Section 80 D on health insurance premiums. You can get a health insurance cover for your parents. It entitles you to an additional tax deduction of up to Rs 15,000.

2. Avoid loans
Next, you need to guard against the temptation to borrow funds to purchase cars, bikes or consumer durables.

You should leave such decisions for the second year if not later. Consumption loans are not a good idea.

Also, if at all you have any surplus left after addressing your needs, it is advisable to avail of a home loan jointly with your parent/s.

3. Strive to save
If you are single and living by yourself with a monthly income of less than Rs 25,000, your target savings rate can be 40%; while it can be 50% for those earning Rs 25,000 to Rs 50,000.

For people with an monthly income of above Rs 50,000, the ideal savings rate would be 60%. A part of the savings could go towards building a corpus for meeting emergency needs.

Ideally, you should direct a minimum of 25% of your gross income towards investments. If you are jittery about dealing in equities, you could put small amounts of money into Unit Linked Insurance Plans (ULIPs), Public Provident Funds (PPFs) and Fixed Deposits (FDs).

While FDs can yield a return of around 10% at the moment, you should go for them only if you fall in the no-tax or low-tax brackets. PPF, which carries a return of 8% p.a, offers tax breaks under Section 80 C. Investing small sums on a regular basis , in Unit Linked Insurance Plans (ULIPs), could result in a sizable corpus over a period of time.

If you invest Rs 5,000 every month in a PPF, your kitty would swell to Rs 17.40 lakh after 15 years. The returns are certainly not comparable to those offered by equities, but it is better than letting your money lie idle in a savings account.

However, your risk-taking capacity would be high when you are in your 20s. Investing in equities — either directly or through systematic investment — could be your best bet. To start with, you need to invest 80% of your target savings in equity through the Unit Linked Insurance Plans (ULIPs).

If you stay invested with a long-term view, equities can offer you far better returns than other avenues.

Besides, investments of up to Rs 1 lakh in some equity MF schemes — equity-linked saving schemes (ELSS) — are eligible for deduction under Section 80 C, thus presenting you with the dual benefit of tax-saving as well as investment.

So, when are you starting your investment and looking forward to build a great corpus???