Every ‘first’ is special. However, when it is the ‘first job and ‘first’ salary, the feeling is unparallel. It not only gives you financial freedom but also sets you free and can work as a confidence booster.
However, we often get way too excited with our first salary and spend it on things which give momentary pleasure. It is not wrong to fulfil those dreams which you had and wanted to fulfil with your own money, but you also need to consider certain other things which can give you long-term benefit.
In this article, we will discuss Investment for beginners. We will tell you how to start your investment journey with multiple avenues that are available. We will also help you chalk out the plan for starting your investment journey.
One of the crucial things that will be discussing is why you should invest early and how it helps you accumulate more wealth.
Basic financial concepts
Before we dig into the different ways or steps of investing your first salary and the subsequent ones as well, you should be aware of certain financial concepts which will affect your money. There are three basic financial concepts which are –
You need to understand how each of these factors affects your investments both in the short and long term.
Compounding of Money
You must have come across elderly people and even some of your friends and colleagues who suggest you start investing early. Have you ever wondered why you should invest early and what benefits you can have by doing the same?
This takes us to the concept of compounding.
What is compounding?
If we talk about compounding, then it can be defined as the process of earning interest over interest. This means, the amount you invested in any investment instrument, that earns interest, and you reinvest that interest and then earn interest on both the principal amount invested in the beginning and also the interest that you reinvested.
This is going to give you more return than investments within simple interests.
Most of the investment vehicles provide the benefit of compounding. The interest so generated over the principal amount and accumulated interests over a period of time is known as the compound interest.
The compound interest is calculated by
= [Principal (1+ interest rate) number of periods] – Principal
= [P(1+i)n] – P
= P[(1+i)n – 1]
For instance, you have invested your Rs. 10000 for 5 years at an interest rate of 5% compounded quarterly.
Then; CI = 10000 [(1+0.05)20 -1]
= Rs. 16532 (rounded off).
How does it work?
The frequency of compounding plays the primary role in accumulating your money over time.
The compounding frequency is directly proportional to the growth of interest. If the frequency of compounding is more, then the interest would grow fast and you can accumulate more wealth.
Let’s see an example –
Suppose, you invested Rs. 15000 at an interest rate of 5% p.a. for a period of 5 years. Now, let us look at the table below which will show how your wealth will grow with different compounding frequency –
|Compounding Frequency||No. of Compounding Periods||Values for Interest (i) and Number of periods (n)||Total Interest Amount (INR)|
|Annually||1||i =5%, n = 5||4144|
|Semi-Annually||2||i = 2.5%, n = 10||4201|
|Quarterly||4||i= 1.25%, n = 20||4230|
|Monthly||12||i= 0.4167%, n = 60||4250|
So, from the above, table you can understand how interest amount changes along with the change in the frequency of compounding.
When the frequency increases, the interest amount grows faster.
Relation between early investments and compounding
The relation between investing early and compounding is based on the above concept. If you invest early, then your money can be compounded more times. This will eventually help you accumulate more wealth.
Who doesn’t want to earn money on his or her own money, isn’t it? Compounding gives the platform to do so. You earn interest on your previous interest.
So, the early you start investing, you can reap higher profits. So, with your first salary, try to invest in some investment vehicle that provides compound interest on the investment.
The second basic concept of finance and investment is inflation. It is the rise in the general price level over a period of time.
While compounding interest help your money to grow faster, inflation does the opposite. It tries not to grow your money or the value of money.
So, inflation and the growth of your investment have an inverse relationship. When inflation is on the rise, the growth of your investment falls and vice versa.
Suppose, you invested in an instrument that provides a 5% return. However, the inflation rate is also 5% in the country. So, the actual growth in your investment is nil. It is because the money you accumulate from your savings will have the same value as it had when you invested it.
To combat inflation, you need to understand “why you should invest early”.
Finally, we have ‘risk’ which is one of the primary factors on which your choice of investment depends. When you are just starting your investment journey, you can take more risk, and eventually when you grow and the level of risk should start decreasing.
The reason behind this is, at an early age, you have multiple opportunities, time by your side to make up for any losses. However, with passing time, the opportunities decreases, and your risk appetite as well.
So, all these three components play a vital role in determining your investments and the growth of it.
So, keeping all these three in mind you need to find out how to start your investment journey and here we can help you to plan the same.
1) Prepare a financial plan
The first step to invest is to plan. Planning your investments and finances is crucial before you take any step.
There are multiple steps involved in making a financial plan so that you can invest properly. In fact, this is the ideal way to start your journey of investment for beginners. Let us take a look at all of them.
Create a contingency fund
With your first salary, not just buy gifts for your parents, create a contingency fund as well. A contingency fund will help you survive in a time of crisis or emergency.
Since, life is uncertain and money is required for almost everything in this world, keep an emergency fund is inevitable. So, with the first salary, you must promise yourself and keep aside a part of your salary that you will not use without any major crisis.
This will not only help you in an emergency but will also develop your savings habit.
Set your financial goal
Step 2 for investment planning is to pen down your financial goals. Financial Goals are nothing but determining the amount you would need to fulfil your financial aspirations like buying a house, wedding, higher education, and others.
Take a pen and paper and write down all your short-term, long-term, and even ultra-short and ultra-long term goals.
This will give you clarity of what kind of investment you would need for fulfilling these dreams in the future.
This is a very important aspect of financial planning to understand “how to invest properly”.
Make a savings Budget
The next step is very vital for savings and that saving is going to get invested.
Assess your income:
Firstly, you need to assess all your earnings.
The primary source of income for you is your salary from the job you just joined, apart from that if you have any other source of income like rent, interest income, or others, you need to evaluate and calculate them all.
List down expenses:
After income, assess all the expenses that you cannot do without. Check where you are spending the most. Try to chalk out plans to cut down certain expenses.
This can be done by making a proper budget for a period – say a week or month. You can list all the essentials and necessary things where you need to spend.
Then stick to the budget and at the end, evaluate whether you spent more than your budget or not and accordingly plan the next.
Save at least a minimum part of your income:
Once you start budgeting, your expenses can be curtailed. This will give you a provision for saving at least a part of your income every month.
Many eminent finance experts say that you must save 50% of your income and consume the rest.
However, in real life, that seems a little impractical given the average salary and the growing inflation but you must save at least 10% to 25% of your income and make it a habit.
2) Evaluate your assets and liabilities
The next step is to assess your assets and liabilities. Assets are your possessions that generate an income while liabilities are the debts that you need to pay off.
If you have availed of loans, assess them and manage them efficiently. Loans like personal loans and credit card debts are high-interest debts that also impact your credit score severely in case of repayment default.
So, pay off these high-cost loans. Good loans like home loans, car loans, etc. can be continued since they build your credit history and home loans also save taxes.
Know the value of your assets so that you can estimate the additional funds needed for meeting your financial goals.
3) Assess your risk-taking ability
Your savings should be invested in lucrative avenues for wealth maximization. However, the choice of the avenues depends on your risk profile.
Assess your risk appetite, i.e. your risk-taking ability. Find out if you are comfortable with market-related risks or you prefer playing it safe. If you are a risk-taker, you can invest a primary part of your savings in equity to get attractive returns.
On the other hand, if you are risk-averse, you should minimize your equity exposure and invest in debt instruments that give stable returns.
So, assess your risk appetite before making investment decisions so that you can pick the right investment tools if you wish to understand “how to start your investment journey”.
4) Invest in health insurance
Even though you are young and might be healthy, the need for a health insurance policy cannot be ignored. Accidental injuries or illnesses might strike anytime and they incur considerable medical costs.
So, after you become financially responsible, ensure that you invest in a suitable health insurance policy for coverage against medical contingencies.
You can buy an individual health insurance policy covering yourself only or you can opt for a family floater plan and cover yourself and your parents under the same policy for wider coverage.
Opt for an optimal sum insured, i.e. Rs.5 lakhs or above, for sufficient coverage against expensive medical costs.
5) Invest as per your risk appetite
If your query is “how to invest my salary in India?”, you need to estimate your risk appetite and then invest accordingly. Now that you have taken care of the preliminary steps, it is time to invest your savings into suitable avenues.
When it comes to investment avenues, there are various alternatives. However, you should keep your risk appetite in mind when investing.
If you have a high-risk tolerance and want to invest in equity, you can choose stocks, equity mutual funds, futures or options.
On the other hand, if you have low tolerance, opt for fixed deposits, PPF investments, etc. that have a fixed rate of return. Try and start a Systematic Investment Plan (SIP) in a mutual fund scheme, equity or debt.
SIPs would ensure regular investments without pinching your pockets and provide attractive returns which would compound over time to create a sufficient corpus for your financial goals.
6) Review, monitor and track your investments regularly
Investing is not a one-time task. You should invest in a disciplined manner, regularly, so that you can create a considerable corpus over time through the miracle of compounding.
Also, monitor your investments regularly. This would serve two purposes –
- You can check if your investments are performing as expected
- You can assess their sufficiency in fulfilling your financial goals
If your investments are not performing as expected, you can switch around or churn your portfolio to get the right asset allocation.
On the other hand, if your investments are falling short of creating a desirable corpus, you should step them up to accumulate the desired funds.
Make it a habit to track your investments once every 6 months or so so that you can take necessary measures to correct any deviations.
7) Plan your taxes
The last step is to plan your taxes. Tax planning helps you utilize the tax-saving sections of the Income Tax Act, 1961 so that you can reduce your tax liability.
Tax planning allows you to pick the right investment avenues that not only match your risk tolerance but also give you the added benefit of tax saving.
When you plan your taxes, you can reduce your tax outgo and increase your disposable income.
An increased disposable income can, then, be used to upgrade your lifestyle as well as your investments so that you can save more.
These are some of the basic principles of investment for beginners. They are also the stepping stones to financial independence and should not be ignored.
So, if you are wondering, ‘how to invest my salary in India’, wonder no more. Follow these tips and plan your finances effectively.
These principles would give you financial literacy and also equip you with the knowledge of how to start your investment journey. While the latest mobile phone might be tempting you to splurge your first salary in one go, resist the temptation. Make the phone your goal, save for it for a few months and then get your hands on it.
The pleasure of planning your finances for the phone would motivate you to plan for your financial goals too.
So, don’t be frivolous with your first salary. Know how to invest properly and make your first salary the first instalment towards your financial independence.