paycheck: How to allocate from your first paycheck


Tanmay is a hotel management graduate in his first job with a reputed multinational hotel brand. He has been employed for the past four months and has been splurging, given his newfound financial freedom. However, he now wants to bring some stability to the way he manages his finances. On putting down his compulsory expenses, including his education loan, Tanmay finds that he is left with a decent amount to save each month.
While his father wants him to invest in a house using a home loan so that he is forced to save, some other friends have suggested investing in the stock markets. A colleague has advised him to get a life insurance policy before considering any other investment options as it will help him in planning his taxes too. Tanmay finds all the advice conflicting and wants some help on how he should go about it.

Income and savings at this stage of a career will not be stable and predictable. Tanmay must take this into account before considering any investment options. The first step is to determine the amount that he will be able to save and for this he will need to draw up a budget. He must be realistic and liberal in estimation of his income and expenses. This should include funds for emergencies as well, since at this stage sticking to a tight budget may not be practically possible. Once he has a fair idea of the amount he can save, he can decide what he wants to do with it.

Protecting his income against unexpected large expenses is essential. Therefore, Tanmay must buy a health insurance cover for himself and his immediate family, especially if his employer does not provide adequate cover. Life insurance is something that he must consider immediately only if he has obligations that he is expected to meet from his income, and not from a tax planning perspective. However, he must invest to take advantage of tax breaks provided up to the maximum permissible limits.

The mandatory contributions to the PF would take care of some part of the tax planning exercise and will provide debt exposure to his portfolio. The remainder is best invested in instruments that give him equity exposure, such as tax savings schemes of mutual funds.

Tanmay should not consider investments or commitments that tie him up inflexibly at this stage of life. Investment in real estate which cannot be withdrawn easily in case of change in income levels is therefore not recommended.

Tanmay should instead consider investments such as equity mutual funds that can accommodate changes to income and savings and also help create wealth over the long-term. A rigid commitment at this point may push him into borrowing which will harm his long-term financial health.

Content on this page is courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.



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