Aveek (23) was delighted to get his first cheque from the multinational company he had joined a month back after completing his studies from a management school. Within a week he bought gifts for his parents, siblings, grannies, relatives and even the dog. The next week he treated his friends for his new job. The week after he bought a few clothes to wear to the office and by the end of the month he borrowed some money from his friend to survive.
In the months that ensued Aveek almost repeated the same cycle adding gifts to other people, credit repayments to friends and payment of credit card bills to the already burdened wallet. Despite working for a year now, Aveek has no savings, no investments, pays huge amounts in taxes and lives on borrowings.
This is not the situation you would want to be. Most young office-goers who are starting their career believe that it is better to enjoy the little and big things in life before they start their finance journey. This is a wrong assumption. Financial planning and management starts from the moment you earn money. Given below are some of the top investment tips for beginners:
Best Investment Tips
- Cash management
- Protection Management
- Wealth Accumulation
- Tax Planning
- Retirement Planning
Cash management: To begin with investment tips, the basics of cash management are to be able to pay your bills on time without any delay or fine. A part of your salary has to be kept liquid to meet regular needs like bills, groceries and daily cash requirements. The best way is to put them in the savings or salary account with ATM option so that they can be accessed at any time. Apart from this, investment tips provided by experts show that a certain sum of money which is equal to three months of your salary should be kept separately for unexpected and unforeseen circumstances. Ideally, one should draw a cash management strategy following the chart providing a beginners guide to investing:
Cash management strategy
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Description
|
Purpose
|
Typical investment options
|
|
Everyday cash
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- Pay bills
- Groceries
- Daily cash requirements
|
Savings or salary account
|
|
Emergency cash
|
- Medical emergencies
- Higher purchases
- Events, functions
- Unforeseen circumstances
|
- 3- 6 months’ salary in savings account
- Short term, highly liquid investments
|
|
Savings cash
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- Asset allocation for investment
- Retirement benefits
- Education costs
|
- Long term investment tools
|
Protection management: Once step 1 has been cleared, the next investment tips to a beginner would be to ensure that he/she and their family are safe from any financial debacle that they may face in the future. Insurance provides that protection to you and your family. In India, insurance is broadly divided into two categories:
- General insurance
- Life and health insurance
General insurance or non-life insurance covers property and cars and provides protection against burglaries, fires, etc. Life insurance provides protection against accidents and sudden demises, while health insurance takes care of medical emergencies. At present, most salaried people are medically covered by their offices. However, these medical insurances are limited to the time you are at service. It is advisable to keep a medical insurance separately that will cater to you and your families emergencies even when you are not associated with any office.
It is said, life insurance should not be mixed with investment. However, it is a must-have listed in all beginners guide to investing.
Wealth accumulation – Stocks, mutual funds, fixed deposits, bonds are some of the investment tips that are oftern listed in beginners guide to investing. Since each instrument offers different rates of returns, it is advisable not to put all eggs in the same basket. This way you can also mitigate markets risks. The earlier you start investing, the more you can earn and save. Also, make sure you are aware of your needs and requirements before planning your investments.
The following table illustrates how a simple investment of Rs 2,000 per month yields in 5, 10 and 20 years:
Expected rate of return
|
|
Annual rate of return
|
|
Years
|
10% on Rs 2000/ month
|
15% on Rs 2000/ month
|
20% on Rs 2000/ month
|
|
2 years
|
53,335
|
56,271
|
59,404
|
|
5 years
|
1,56,165
|
1,79,363
|
2,06,908
|
|
10 years
|
4,13,104
|
5,57,315
|
7,64,727
|
|
20 years
|
15,31,394
|
30,31,910
|
63,22,959
|
Tax planning: For all salaried people below the age of 60 years, the most important aspect of income is taxation. If you are starting new, then you should immediately start planning your taxes. The Government of India provides a tax exemption for income upto Rs 2,50,000. Income between 2.5 lakh and 5 lakh is taxed at the rate of 5% of the total income above 2.5 lakh. For income between 5 lakh to 10 lakh, the tax rate is 20%, while those above 10 lakh annual income of Rs 10 lakh need to pay taxes at the rate of 30%. However, one can claim deductions under various sections of the Income Tax Act such as mediclaim, LIC, PPF under 80C, house rent under 80GG where HRA is not paid, home loan under 80EE.
Retirement planning: With the cost of living rising, it is better to start planning for retirement early. This is one of the most neglected components of financial planning with most people worrying about education, marriage, homes and cars and not saving for their golden years.
Following these top investment tips for beginners would not just ensure a smooth-sailing present, but a secured future too.