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Aditya Birla Sun Life AMC Limited

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    Aditya Birla Sun Life AMC Limited

    Making the Most of Your First Salary: A Guide to Financial Success

    Sep 10, 2024
    10 min
    4 Rating

    Earning your first salary marks the beginning of a new chapter in your life. The first thought crossing your mind will be buying all the good things on your wish list, partying, or indulging in fun activities. These activities may be serotonin-boosting, but splurging on your first salary is not a wise decision. You should maintain a strategic approach to your salary right from the beginning. Your financial journey has just started, and we are here to guide you.

    Basic financial steps to manage your first salary

    1. Create your financial budget.

    Creating a budget is the most basic and crucial action on a financial journey. Your budget planning covers all important financial aspects, including total income, total expenses, excess cash, etc. The main aim of budget planning is to make you aware of your cash flow, i.e., where you spend money or where you need to save. If you have any debts, loans, EMIs, etc., you can track them wisely through budget planning.

    First, create a list of all income sources (your side hustle too) and total expenses (including EMIs, debts, loans, etc.). Subtract your total expenses from your total income, and you will get your net worth. Now, saving your net worth is all part of budget planning.

    2. Choose your financial goals

    Setting goals plays a big part in your life. Goals are the signposts that give you directions in your life. Without these signposts, you will be directionless and end up splurging, leaving no emergency fund for unforeseen situations. Setting goals will discipline you.

    Goals can be divided into 3 parts:

    Long-term goals: Want to plan for your retirement? Or do you want to buy your dream house? These long-term goals require a minimum of 5–6 years to come into play.

    Short-term goals: Short-term goals include paying student loans and building an emergency fund.

    Ultra-short goals: Is your mother's, father's, or sister's birthday in three months? These ultra-short goals have a shorter duration.

    Once you identify and prioritize goals, you can carefully divide your savings and invest in them accordingly.

    3. Choose a savings plan.

    The goals of every investor differ, and so does the investment amount. With differences in the salaries, providing a specific amount for investment is senseless and unreasonable. Therefore, we suggest a few rules to proportionate your salary according to your savings goals.

    50-30-20 rule

    • 50%: invest in needs like rent, groceries, electricity bills, etc.

    • 30%: invest in your wants, like shopping, birthdays, etc.

    • 20%: invest in savings for goals like retirement, an emergency fund, etc.

    50-15-5 rule

    • 50%: save for essential expenses like house rent

    • 15% savings for retirement only

    • 5%: invest for short-term savings, like building an emergency fund.

    Remaining 30%: for discretionary spending like shopping, subscription services, dinner parties, etc.

    40-30-20-10 rule

    • 40% savings for necessities like groceries, house rent, etc.

    • 30% savings for discretionary spending like shopping, parties, etc.

    • 20% savings for your long-term goals like retirement, wedding, etc.

    • 10% savings for meeting financial goals

    Note: All the above calculations should be inclusive of taxes. You can adjust the percentages of these rules to suit your financial goals.

    Consider mutual fund investments

    Earning your first salary marks the auspicious start of your financial journey. Coupled with smart budgeting, your salary can be the common denominator between long-term savings and mindful spending. Mutual fund investments can be a smart budget decision.

    Mutual funds are becoming a trending investment option among common people for achieving long-term capital wealth creation. You don’t need to have a large corpus to invest in mutual funds, but you do need a disciplined financial system. You can achieve a disciplined investing habit through two methods.

    Method 1: Consider a lump-sum investment.

    A lump-sum investment is a one-time, single investment. In a lump-sum investment, you invest the money all at once. If you can afford to invest a considerable amount in one go, then this method might be beneficial for you. A lump-sum investment is advisable for prominent or seasoned players who are willing to have some risk capacity. Investing the entire amount for a longer duration may help in wealth creation.

    Method 2: Start a SIP investment.

    A SIP investment is a systematic investment approach that enables a specific amount to be invested in mutual fund schemes at regular intervals. A SIP investment facilitates easy payment, doesn’t require timing the market correctly, and promotes financial discipline. A SIP investment works well with mutual funds. With various mutual fund types and schemes available in the market, securing your long-term goals has become easier.

    Build an emergency fund

    Create an emergency fund separately to cope with a sudden financial crisis. A sudden financial crisis might look like an urgent credit bill, a medical emergency, etc., and if you don’t plan, you will end up in a messy debt. Experts recommended saving a corpus of approximately six months of your monthly salary. This financial awareness will pull you out of any financial crisis. Therefore, you will need a fund that is easily accessible and has a quick redemption facility. For examples, liquid funds and overnight funds provide instant redemption facilities.

    Debt funds can be a good option for creating an emergency fund. They invest in low-risk securities like government bonds, Treasury bills, etc., with the maturities of less than 91 days. Investors with the goal of generating steady income can opt for these funds. They may not provide higher returns as compared to equity funds, but they are less volatile than equities. Therefore, debt funds can provide some security for your investments. Investors should note that debt funds are not entirely risk-free as they are subject to interest risks. Debt funds like liquid funds, overnight funds, ultra-short-term funds, money market funds, and short-duration funds can be the suitable options for emergency funds.

    Start your retirement planning

    Starting an early budget plan leaves you with a larger corpus at the time of retirement. Undervaluing the power of investing for retirement early may put you in an unforeseen financial crisis, especially at this tender age when a monetary backup is non-negotiable. Fortunately, many mutual funds offer retirement-oriented schemes that may suit your retirement goals.

    Conclusion

    Isn’t your first salary a door for all good investment options? Commit to your future from day one. We get that growing your savings requires some skills, but if you begin now, you will be better at managing your corpus as time passes. Getting your first salary is just the beginning of financial discipline. Stay consistent, and it may reward you when you need it the most.

    We don’t encourage saving 100% of your salary or forcing yourself to avoid reveling in fun activities. We encourage being mindful and intentional with your spending habits. Saving your money strategically can prove to be the best life decision for you. The initial road will be difficult, but a long-term perspective can bring financial freedom.

    The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations, or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Aditya Birla Sun Life AMC Limited/Aditya Birla Sun Life Mutual Fund is not guaranteeing/offering/communicating any indicative yield/returns on investments.

    Mutual Fund investments are subject to market risks, read all scheme related documents carefully.