The feel of the first paycheque in life is always thrilling and filled with anticipation as it is your first step to financial freedom. It is thrilling because you can now spend your own money the way you wish to, without having to ask anyone.
On the other hand, you are also filled with anticipation about how to invest your salary judiciously to ensure it helps you achieve your financial dreams and aspirations with élan.
Thus gaining know-how on investment strategies for beginners becomes important.
Having said that you may be wondering ‘how much to invest if my salary is INR 25,000?’ What is the right plan(s) to invest in? What are the investment options available?
How much to invest in insurance, mutual funds, shares or real estate among other available options? Also, how much to keep in savings account for meeting monthly expenses and/ or meeting exigencies?
Most of the youngsters have a tendency to hit upon an investment in a retirement plan to start it, without putting much thought behind it as their first investment.
However, before making your investment choices on where to invest your money and how much to invest.
Top #6 things to consider before investing:
You should ideally consider a few things in life like your:
1) Age –
Start investing as early as possible in life as investments/ products will cost much less when you are young.
Your investments will also get more time to maturity and the power of compounding (wherever applicable) will get enough time to show its magic in creating wealth for you.
2) Life stage –
At the time of planning your investments, whether you are married or single, with or without children, single and responsible for old parents, etc. will determine your financial goals and your investments options accordingly.
3) Financial dreams or goals you want to achieve in life –
You are likely to have various financial dreams viz. wealth creation, planning exotic vacations, children’s education, retirement planning, assets creation, etc. These dreams can be realised through investments in different asset classes.
4) Timeline you have to your chosen financial dream(s) –
Whether the financial goals are to mature in 2 years, 5 years or 10 years time or beyond that will also determine the investment tool(s) you need to put your money in to support your financial dreams.
5) Investment capacity –
This is an important consideration for you when you define your financial liability as you must cut your coat always according to the available cloth.
Never make a commitment beyond your capacity; else it will be difficult to feed your investment till maturity/ term as the case may be.
With the increase in income in subsequent years, you will get time to increase your commitment to most of your existing investments.
6) Risk appetite –
Though you are young and have ample time to grow your wealth over a period of time with maximum exposure to equity and equity-related investment options; your attitude towards such investments or risk appetite may not support optimal equity exposure in your investments per your age.
Thus investment tools need to be suggested and chosen not just based on your need, but your risk appetite as well to ensure your peace of mind.
Keeping all of the above and more in mind, you must choose the investment options that will help support your financial objectives in the most efficient way.
There are certified financial planners/ advisors in the market as well, who are equipped with the knowledge and experience to guide you on how to invest your salary in the most prudent manner.
Discussed here are the various investment options for youngsters like you in the age group between 22 and 30 that are best suited to support your financial needs/ dreams based on various income levels.
Let us take a look at how to invest your salary along with the investment strategies for beginners if your earning is about Rs. 25,000 a month.
a) Life stage: Single living with parents
If this is your first job and you are single and, living with parents who are not totally financially dependent on you, the thumb rule says, that you should be able to save/ invest at least 50% of your annual salary in various investment vehicles suggested here.
1) Systematic Investment Plan (SIP):
A Systematic Investment Plan is a wonderful tool for wealth creation in the long run if your time investment horizon is about 10 years and more.
So consult a financial planner on how to invest your salary in a committed monthly amount in suitable equity (debt and balanced options are available too) based SIP(s).
You can start your first SIP even with a minimum of Rs. 500 commitment per month to yield a handsome return over a period of time.
The SIPs should be continued for the term and additional SIPs (when salary increases) to diversify the portfolio should be made to support your various long term financial goals that are expected to come up in future.
Today SIPs are possible even in stocks for long term investments. You may also look at starting a SIP in ELSS or Equity Linked Savings Schemes that not only yields good returns that beats inflation, it also helps you in saving tax as well u/s 80C.
2) Life insurance:
A term insurance policy with sum assured or life cover worth Rs 50 lakhs.
If you are below 30 years old and enjoy good health, then as per regulatory guidelines (by IRDA), you can get a life insurance cover in lieu of 22 times your average annual salary of the last 3 years.
So if your annual salary is say, Rs. 3 lakhs then you are entitled to 66 lakhs (3 lakhs x22) of sum assured or life insurance cover.
Since you are young, the cost of the insurance will also be low; hence you must take a term plan for at least Rs 50 lakhs to start with and should increase the cover as your annual compensation increases.
For example, when your income becomes Rs. 50,000 a month, then the ideal sum assured on your life should be at least Rs. 1 crore (6 lakhs x 22 = 1.32 crores) that you can keep revising based on your financial liabilities. This will take care of any future liabilities (if any) at minimal cost in the face of any life uncertainty and will prevent any financial burden on your family.
3) Health insurance:
As per the thumb rule*, a Health Insurance coverage of at least 5 lakhs must be taken if you live in a Tier 1 city to take care of any medical emergency in life. In case your dependent parents are not covered, then you can also consider a family floater of a similar amount to begin with.
With the increase in your income, later on, you may also look at an additional top-up for critical illness for the whole family including you to protect you and your loved ones in the family against unforeseen critical and terminal illnesses.
4) Public Provident Fund (PPF):
Public Provident Fund has a 15-year maturity with a 7 year lock-in period. The annual interest rate on PPF is 6.4% which is still the highest guaranteed return available on any debt instrument today for your age group.
You can look at opening and maintaining a PPF account with a minimum of Rs. 500 a year to keep the account active. The highest individual contribution can go up to Rs. 1,50 000 a year.
Later on, you may want to slowly increase your contribution into your PPF account as this instrument is tax-efficient as well as u/s 80C.
Moreover 7 years from the date of commencement of this instrument, your PPF account provides you liquidity in times of financial emergency through partial withdrawals.
So do keep nurturing this investment every year as all the withdrawals from your PPF account are tax-free in your hands by law.
b) Life stage: Married with a child:
If you are 30 years old or below and are married with a child and your earning is around Rs. 25,000 a month, you should be able to save at least 25% to 30% of your income to meet your future needs.
You must consult your financial planner/ advisor to guide you on how to invest your salary prudently in the above investment vehicles among other available options; in order to help you achieve your financial goals.
The best thing about salaries is that they keep getting revised every year under normal circumstances.
With the increase in the annual income levels, you may get confused about how much to save and how much to spend or how to invest your salary and where to invest your money optimally without having to compromise on your wishes to buy luxuries for your loved ones at the same time.
However, it will be good to remember the following points with regards to various investment options at the very onset of your career to decide wisely whenever and wherever required.
1) SIPs as retirement and wealth accumulation plan:
Early Investments in equity-based SIPs can serve as a great plan for building a big retirement or wealth accumulation corpus because the returns it is likely to generate over a span of 20 to 25 years or more than traditional investments. This is because –
- Compared to any retirement plan, the fund will be managed aggressively as they have better equity exposure than any traditional retirement plan. Thus the expected retirement corpus will be much more compared to a normal pension scheme where exposure to equity is much less; given the conservative nature of the plan and its objective to play safe with the investment strategies.
- Such SIPs have historically been effective in beating inflation at any point in time and been successful in building a big corpus to invest further as desired.
- Though, if you invest in a normal pension scheme, one-third of the corpus will be tax-free if you withdraw as a lump sum at vesting age. The remaining two-third is taxable if you withdraw without reinvesting it for annuity (pension) income thereafter. The returns you can expect from SIPs are likely to offset the loss you may have incurred in the tax-free return from the traditional pension plan.
2) Life insurance
Though you start with a 50 lakhs life cover on you, per the thumb rule, be watchful and revise the life insurance cover as and when you grow in your career and your salary increases.
It is important to keep in mind that with growth in your career come additional responsibilities that may even require you to travel for work.
It will also increase stress levels that add further uncertainties to life. Hence an adequate life cover would become critical to ensure that the lifestyle you have gifted your family with growing income levels, as the earning member is maintained in the face of any uncertainties posed by life.
Not to forget the higher education costs of your child too.
3) Health insurance
If you are married with a child. I.e. a young family of 40 years old or less, the coverage must be of at least 10 lakhs in a Tier 1 city.
Remember, medical Insurance becomes even more important as you grow not just in years, life stages, but in your career as well in future.
Stress, hereditary and lifestyle diseases generally and slowly surface as a fall-out of growth in career and additional responsibilities and increase of pressure at the workplace.
While all these make it important for you to take care of your health by maintaining a good exercise regime, proper diet and sleep routine; it is also critical that you maintain a healthy medical insurance cover for self and family at any point in time to mitigate any financial exigency arising out of untoward health condition(s).
4) Investments in debt instruments other than PPF:
In case you are a risk-averse person, you must try and have some exposure in debt instruments like fixed deposits and debt mutual funds as well aimed at getting you better returns compared to the savings account and allow you liquidity as well.
5) Other debt instruments like MIS:
If you are not a person with a great risk appetite and look for a steady flow of monthly inflow of money from your investments, then the best investment plan for monthly income is perhaps the Post Office Monthly Income Scheme (POMIS) that gets you an assured 6.6% interest on investments.
As an individual, you can invest up to Rs. 4.5 lakhs and a joint account would allow for an investment of Rs. 9 lakhs. If you are a resident Indian and have money to invest in safe vehicles, this instrument is a good avenue where the monthly disbursement is not subject to TDS (tax deducted at source).
Other monthly income schemes are available with Bank Fixed Deposits MIS, Mutual Fund Systematic Withdrawal Plans too.
Points to keep in mind:
When you plan your investments, it is best to keep the following in mind so that you can create a healthy investment portfolio.
One thing that you must avoid is to take personal loans for meeting small financial goals, like planning a vacation, buying an expensive consumer durable or a motorcycle or your first car when income increases, etc.
Rather you must use your older SIPs and/or FDs to support these purchases as required as and when you plan such investments.
2) Build and Emergency fund
All of us struggling with the landscape scale pandemic like Covid-19, know how uncertain life and work is. There is no guarantee anywhere about anything in life.
This makes keeping aside a specified amount of money in a separate account on a monthly basis towards building an emergency fund definitely an act of wisdom for youngsters like you.
You must look at maintaining about a 3 to 6 months salary as an emergency fund for the future.
To Wrap it Up:
Most of the structured organisations make deductions for Employee Provident Fund, National Pension Scheme from the salaries of the employees and also provide you a medical insurance coverage (floater) that covers your spouse and child as well.
Some organisations extend the medical insurance coverage to your parents too (at times employees need to pay the premium for the latter).
There is a decent amount of accidental insurance coverage in your life too given by the company as a part of their employee benefits.
In these situations, young employees like you feel the urge to reduce or withdraw their investments in life insurance, medical insurance and PF contributions.
This is a big mistake people make; given the uncertain environment, we operate in. Thus you must not only continue with your existing investments as detailed here, but you must also try and look at other avenues to invest further as your income increases.
Experts are of the opinion that once your income crosses Rs. 1, 00, 000 then you may look at investments in real estate if your family does not have their own home unless your objective is solely to get the tax benefits associated with home loans.
Experts also say that when your incomes cross the Rs 2,50,000 a month mark, you should ideally aim at investing 20% of your salary and more in various other asset classes like but not limited to, commodities, stocks/ equity, debt instruments including debt funds, bonds, liquid funds, various other insurance plans and real estate as well.
An investment portfolio strategically designed early in life is a sure shot way to achieve true financial freedom that ensures happiness and peace of mind to see your financial dreams come true.
So what are you waiting for? Start your research or connect with your financial advisor to rise and shine with your financial planning for the future today!