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5 Things To Do After You Start Working

5 Things To Do After You Start Working

Finally, after years of education, you land up with a job. While you have been using your parent’s money for so long, it is time to use your money.

Your first salary marks the beginning of your adult life. This means that you would now have to file your tax returns, start investing to save tax as well as for other financial goals such as buying the first home, getting married and raising kids.

While it may sound like a lot, managing these things is not hard if you know the steps.

Step 1: Create an emergency fund

Emergencies can strike anytime and anywhere. Hence, it is important to stay prepared for any emergency. Now, that you have a job at hand, give your parents rest and start accumulating a corpus for the rainy day. These emergencies can be a job loss, your vehicle breaking down etc. The emergency fund will help you to tide over these circumstances.

Ideally, an emergency fund should be 3-6 months of your expenses. So if your monthly expenses are Rs.20,000 your emergency fund would be between Rs.60,000- 1,20,0,000. That’s a huge amount! You might not be able to achieve it at the first go. So start by saving small amounts every month in a separate savings account or park it in a liquid fund and slowly built it up to Rs. 1,20,000 (in this case).  You can start by putting Rs. 10,000 in the first month, Rs.20,000 in the second month and so on.

Step 2: Make a budget

If you want your finances to be in place, then you need to make a budget. No, you don’t have to track every penny. Just apply the 50-30-20 rule of thumb for your income.

50% income should go towards your needs i.e. living expenses (groceries, rent, utility bills, etc.)

30% income should be saved for your long-term goals (buying a car, a home, retirement, etc.)

20% income is the extra cash you can spare for your wants or short term goals (eating out, holidays, shopping sprees!)

These percentages are indicative and you can tweak your budget accordingly!

Step 3: Declare your investments

Declaring your investment is probably the first thing that you have to do after you start working. It has to be done at the beginning of the financial year. You need to declare your investments in tax saving schemes so that your company HR may deduct the taxes from your monthly salary accordingly. Declaring your tax-saving investments will also result in higher in-hand salary.

You will receive emails from the HR asking you to declare your investments. Many corporate offices have tie-ups with third-party services that allow employees to declare their tax-saving investments easily on their portal. Add your existing tax-saving investments or other elements like education loan or home loan on the portal.

You need to keep in mind that the investment declaration is an estimate of the tax-saving investments that you plan to make in this financial year. You don’t have to submit your actual investment proof till the end of the financial year.

However, don’t need to keep investing until the last moment. This brings us to the next point of investing in tax saving instruments.

Step 4: Invest in tax saving instruments

There are many different investment options through which you can save tax and grow your money as well. Public Provident Fund(PPF), Equity Linked Savings Scheme(ELSS), National Pension Scheme(NPS) and Unit Linked Insurance Plans (ULIP) are some of the popular tax saving options. Also, the Employees’ Provident Fund is a tax saving instrument where you contribute 12% of your basic pay is a tax saving option.

Most of the tax-saving investment options fall under Section 80C of the Income Tax Act, 1961. Under this provision, investors can claim a tax deduction of up to Rs. 1.5 lakh in one financial year.

While choosing the tax saver options, several other factors such as safety, liquidity and expected returns, tax on the returns should also be considered. E.g., PPF comes with a lock-in period of 15 years while the same is three years for ELSS. Also, in PPF you can make a maximum contribution of Rs.1.5 lakh. There is no investment limit for ELSS.

ELSS is a category of equity mutual fund that helps you to save tax as well as build wealth over the long run.

Hence, it is important to keep in mind the factors before investing in any tax saver option.

Step 5: Invest for other goals as well

We all have financial goals. These may include buying a new house, going on a world tour or setting up a business. Retirement is a financial goal that no one can deny. While you can take a loan to buy a house, go on a world tour and set up a business, you won’t get a loan to fund your retirement. Hence, it is important to start planning for retirement as soon as you get your first job. You can start by investing 5% of your salary towards your retirement in a mutual fund through Systematic Investment Plan (SIP).  E.g. if your salary is Rs. 30,000, you can start planning for your retirement by investing Rs.1,500 per month.

For your other financial goals, you can segregate into short term, medium-term and long term goals. For short term goals like planning for a vacation, you can set up a recurring account or set up a SIP in a liquid fund or an ultra short term fund. For the goals with an investment horizon of five years or more, equity funds are better investment options as it gives higher returns in the long run.

Creating an emergency fund, making a budget, declaring your investments, investing in tax saving investment options and investing for other financial goals are the five things that you need to do after you start working. This will help to make sure that your financial life is on the right track since day one.

 

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