Ishan Khanna (24) is on cloud nine. His first salary was credited to his bank account a few minutes ago. He called up his friends and invited them to a party. By next morning, his account balance was close to zero. He had to request his friend to pay for an Uber ride back home.
This is not a unique story. There are many young professionals out there who splurge their income without giving any thought to the future. This is the reason why investment planning is very important.
This article will list out how young professionals can start investing their money.
- Create a budget
This is the first place to start. Before you think of opening a Demat account, you need to have a good understanding of your financial status. Open your note book (or an excel spreadsheet) and create a budget by listing out the important factors such as income, monthly expenses, debt (student loans or credit card loans) and savings (if any).
When you complete this exercise, you will get to know exactly how much money you save every month. More importantly, you will learn how much more you can save when you cut down on discretionary expenses. For example, do you really need to buy a new smartphone every six months?
- Build an emergency fund
Now that there is enough money in your bank account each month, it is important to create a solid emergency fund. The uncertainty of the future has deep financial implications. For instance, a job loss can be a shocker. But your situation can be a lot worse if you don’t have the financial support during such a time.
You should consider building up a fund that is worth at least three months of your salary. The best way to go about this is to open a separate bank account for the emergency fund. This way, you can avoid withdrawing from it accidentally. Creating an emergency fund also offers additional benefits such as investment discipline.
- Retirement
Your last working day might be another thirty years away but that doesn’t mean you should not think about your retirement fund. In fact, planning for your retirement should start the day you land your first job. This is to ensure that you have financial support after you stop working.
Find out if your company offers retirement plans and sign up immediately. Generally, most companies provide gratuity and provident fund options too when you first join. Planning for retirement is crucial to any good investment plan.
- Systematic Investment Plans
Typically, for most young professionals in their first jobs, the salaries are not very high. So even if you have some great investing ideas, you might not have the financial resources to execute them. That’s why Systematic Investment Plans (SIPs) might be the best option for you at this stage of your career. You don’t need a lot of money to get started. In fact, there are funds which allow you to start with as little as ₹ 500.
By systematically investing this amount month after month, you can build up a steady corpus over time. As your income increases, you can increase the investing amount too.
- Invest in long-term equity funds
While there are numerous avenues available, it is best to select long-term growth funds to enjoy great returns in the long run. Most investors shy away from equity funds as they consider them to be risky. It is true that equity funds are riskier than other investment options. But they also provide some of the highest returns among all asset classes. The best way to minimize this risk is to invest for the long-term.
Consider investing in moderate risk funds such as diversified equity funds or balanced funds. However, if you are interested in higher returns, mid-cap and small-cap funds might be better options for you.
Perhaps the biggest asset in the hands of young investors is time. You might not have a large amount of money but you have the ability to create it over a period of time. You just have to invest regularly and the “power of compounding” does all the work for you. In other words, the money you make, in turn, makes money for you. Any financial calculator on the internet will show you the same thing. By starting early, you can reach your financial targets comfortably.