How to make the most of your first paycheck

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It’s a proud moment when you receive your first paycheque. The transition from financial dependence to independence instills a sense of pride and confidence. The feeling of achieving the ability to take future responsibilities on your shoulders propels you on your growth trajectory.

However, once a regular salary starts to be credited to the bank account, you can become carefree with your expenses. If this habit is nipped in the bud, it can lead to better financial results.

Saving and investing should be your first priority when you start making money. Ideally, you should invest at least 20% of your net salary. The earlier you start, the better for you. Making informed investment decisions is something you should consider early in your career.

Here are five investments you might want to consider once you get your first paycheck.

1) SIP in Equity Mutual Funds: A monthly systematic investment plan (SIP) in a mutual fund is worth looking into. Once a SIP is registered, a fixed amount is deducted from your bank each month. It is used to buy units of a mutual fund of your choice. A stock SIP is one of the most convenient ways to build wealth by investing in stocks through long-term mutual funds. Although returns are not guaranteed here, we have seen that stock markets have generated about 12% annual returns on average over the past 20 years.

2) Open a PPF account: Opening a Public Provident Fund (PPF) account with banks or post offices is a good way to gain exposure to debt assets. PPF pays 7.1% guaranteed interest. He has a 15-year lock-in, although partial withdrawals are allowed. PPF helps an investor build long-term wealth in a secure way. It also grants investors tax deductions under Section 80C. One can invest a maximum of Rs 1.5 lakh and a minimum of Rs 500 per year.

3) Get a health insurance plan: It is advisable to take out health insurance that protects you from hospitalizations and unexpected health crises that can drain your finances. The premium paid for health insurance will eventually turn out to be a good decision because you will be financially protected in case of a medical emergency. More importantly, when you are young, your health insurance premium will be minimal.

4) Divert monthly savings to a bank deposit or cash fund: In addition to monthly investments, you should also save for emergencies. You can deposit an amount each month into a bank deposit or liquid mutual fund. At the end of each month, the savings can also be directed to these options instead of leaving that money unused in your bank account. A liquid mutual fund invests in debt securities and short-term money market instruments. As a general rule, money placed in a liquid fund generates better returns than a savings account. This way, not only are your savings safe, but you earn relatively better interest. You can withdraw the desired amount according to your needs while the rest remains invested.

5) Gold ETF: You can consider investing around 5-10% of your monthly investment in gold-listed index funds. Rather than owning physical gold, consider investing in digital gold through gold ETFs. Investing in gold-related instruments gives you the advantage of hedging against inflation; it also helps with diversification.

While deciding on various investment avenues, a young investor may prioritize asset allocation with a strong inclination towards equity-oriented investment instruments. Although there is no rule of thumb, it is a good investment approach to ensure that your equity investment represents 60-70% of your overall portfolio.

Debt assets can support 20-25%, while the rest can be gold. Equity investments typically beat inflation by a wide margin over the long term. Since a young investor in his early twenties has more than 30 years of professional life, he should focus more on equity investments. Higher exposure to stocks for more than two decades will lead to substantial wealth creation and allow you to become financially independent.

(The author is CEO, Bankbazaar.com)

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