Why financial planning is essential early in your career
When you start earning after years of hard work, you taste the freedom to spend your own money, on things you want to. But this is the time you need to have a sense of priorities and proportion, so as to not make the mistakes likely in this phase. We discuss here, what all should be prioritised.
Expenses and savings
At a young age, conspicuous consumption is usually a priority. Things like high-end brands, eating out, credit card punching, showing your ability to afford, etc. have a lure, which is natural. Enjoying your life is important, this is what you have been working for. However, do not forget the sense of proportion we mentioned earlier. Try to save 30% of your net-of-tax earnings. It is not a tough ask, you need not earn ‘that much more’ to save. Many people survive on earnings lower than yours.
If you are unable to save 30% of your earnings, you need to question your expenses one by one, and the answer will come out. Non-essential expenses need to be curbed, to achieve this objective.
Debt trap
Some people fall prey to the ‘debt trap’ i.e., spending more than earnings. This happens with the easy availability of credit cards, EMIs, personal and other loans, etc. Beyond a point, your loan repayments become a burden on you, when you have to take a loan to service another loan. It is important to have a tab on your expenses and stay within your means. Some people manage their credit card expenses by timing the spends and cash flows so that the bills are paid by the due date and there is no outstanding or interest thereon.
As long as it is within manageable proportions, it can be tried, but it is important to save 30% of your net-of-tax earnings. The interest rate you pay on loans or EMIs or credit card outstandings will be higher than what you earn on your investments. Rather than helping others (the loan providers) earn money, help your own future by saving and investing.
Purchase v/s renting your accommodation
Though there is an emotional aspect of owning your own home, it is better to wait out a few years till your career stabilises. There is a calculation involved here, distinct from the emotions of owning your home. That is, rental yield. If you own a residential flat and rent it out, the amount of rent you would receive per year is much less than, say, what you would earn on bank term deposits.
Though rates on commercial properties are reasonable, returns from renting out residential property is in the range of 2-3%. While it is not remunerative to rent out your property, the other side of the coin is, if you are availing of a flat on rent, you are better off. In the initial phase of your career, have a priority for saving 30% of your income. In case of a temporary loss of job or other instability, the housing loan
EMI becomes a burden
The counter-argument to this is, instead of paying out rent, use it for EMIs, so that you own the property. Once you have built up a safety net corpus, so that you can withstand temporary loss of job and you can visualise stability in your career, you can go for it.
Conclusion
In the initial phase of your career, it is advisable to have as light burdens as possible—it could be housing loan EMIs, other loan EMIs, credit card outstandings, etc. You should also inculcate discipline in your expenses so that things don’t run out of control and you can start saving for your retirement. The earlier you start, the higher ‘compounding effect’ you get on your investments.