Creating A Financial Planning Toolkit As An Early Career Professional

This post is part of a bi-monthly series bought to you by Ayushi Mona for InsideIIM called 'Headstart'. This is post number eight in the early career series.
Read the previous article here.

If you are yet to receive your first salary or have just started earning - you aren't likely to be very financially savvy. Yes, there is always the odd person who is into ' stock markets', 'financial news', and 'Warren Buffet-style value investing'. These folks typically tend to be in a financial stream of education (CFA) or have role models around them. This article is not for them. This article is for people who think of money in a simple fashion, who probably had parents whose only concept of financial education was giving an ad hoc expense allowance every month and whose education did not equip them to deal with the complexities of our taxation system. So, here are the basics of starting out.

1. Always remember personal finance is personal. Unless you have the exact same bank account, tastes, lifestyle, career trajectory and dependents as someone, replicating their choices will not work. So, think critically and think for yourself. The intention of this article is to nudge you in the right direction and not to spoon-feed you a regimen.
2. Start reading: The three best resources for beginners are:
   1. The Psychology of Money by Morgan Housel: What you could be doing wrong due to your way of thinking erroneously. There is no financial gyaan, maths, charts, or news in this book. Just anecdotes that unpack common mistakes. Knowing what not to do is the best thing to know. 
   2. Let's Talk Money by Monika Holan: Sensitized to the Indian context, Monika's book will help you understand the basics of terms that may confuse you if you are not financially savvy - equity, debt, ELSS, NAV. Simply told and straight forward, Monika's book will gradually help you to just 'be aware of the basics'
   3. ET Wealth: A weekly newspaper, dedicated to personal finance - subscribe to this once you have read the above two. Why? Because, then you would understand the basic terminology and be able to tie it to daily updates. While ET Wealth has promotional articles, it also has a lot of case studies of real-life people and how they can re-jig their financial life. You can avoid mistakes then.
3. Do not watch: Financial news, WhatsApp group with stock tips, YouTube get rich schemes are all tricky. There can be great nuggets there but you as someone starting out can hardly discern. So, stick to reading over watching, for most of your research.
4. Get your house in order: Before you even invest, you need to have all financial documentation in order (Aadhar, PAN, images, age proof, who you want to nominate). I am often surprised by how many people don't have this in order at the time of starting out. Having multiple bank accounts is ideal. Remember, the government only compensated 5 lakhs per bank per account, if a bank ever fails - so never cross that limit in your savings account. Have accounts in systemically strong public and private banks so you do not have to face YES Bank/PMC bank scenarios. Do not get multiple credit cards from multiple banks. Try to keep your PPF, NPS account centralized with one or two banks (it minimizes the effort of managing). Use direct brokerage services like Kuvera, Zerodha, Groww or websites of Asset Management companies.
5. Figure out what you need when: I hate to say this but most parents tend to have made some financially poor decisions for their children. Chief among them are random child education or hybrid insurance-investment plans, ULIPs, endowment plans, or going overboarding on debt-only products like Sukanya Samriddhi, National Savings Certificates or FDs. If these products are in your name, figure out what you want to keep, transfer to another type of asset and which absolutely need to go. Example - if you don't have people who are financially dependent on you - why do you need insurance? If you work in the private sector and will switch jobs often in your career - you need your own health insurance.
6. Living only in fear or greed: Most people are either too afraid to try new things (at least, I know what a Fixed Deposit is - how do I even choose between gilt, debt, arbitrage, liquid, whatever-the-heck-this-is) or too greedy (I will blow my entire bonus in buying the dip in a volatile market). Remember - Balance your desires and fears! And, sometimes, return of your capital is more important than return on your capital!
7. An optimum beginner's portfolio should contain the following elements :
   1. Security first: Save 6 months of expenses in a Fixed Deposit or liquid find for easy access during emergencies such as a lay-off or personal tragedy. Use this for an emergency, not a trip after a break-up or lending to a friend. This is your "Use a oxygen mask on yourself before anyone else" money.
   2. Additional security: If your family or anyone else is financially dependent on you, or will be responsible to pay a loan or debt (such as education or home loan), if something ever happens to you take term insurance online with an accident and critical illness riders. 
   3. Health Insurance: This is tough because health insurance is only driven by hospitalization in India, quite expensive, and confusing. Most formal sector companies provide insurance which makes us complacent. However, taking health insurance for yourself is something I would recommend keeping in mind how fickle employment today is. You can also take additional coverage for the elders in your family who may be retired or not protected.
   4. Don't pay tax in your first few years! Many young people are terribly lax with tax - they do not pay or file ITRs. This is bad and spoils your financial discipline later in life, not to mention not the right thing to do. Of course, in the early years of your career - when your salary is low, just doing something as basic as deductions under 80C (savings), 80D (medical insurance), NPS/donations etc. can ensure you do not have to pay any tax. So start this discipline early on. On the other hand, invest to invest, not to run away from taxes. A five year FD hardly serves your purpose if you actually should invest in equity - so choose what tax-saving instrument you want to go with.
   5. Equity is neither your friend nor your enemy: Equity is nothing but ownership - you can own a company, be a shareholder or a stock owner. It's one way to beat inflation. So, invest without fear, but with caution and only over the long run! Don't get tricked into stories that over-sell equity or debt. Everything has a place.
   6. Provident Fund, Gratuity: Understand what are the retiral benefits that your organization gives you. See if they allow you to maximize it. Create a PPF account if you work for a startup or in the gig economy.
   7. Credit Cards: I am not against credit cards. If you can keep them and pay them off in time, always in full - they're great. If not, they can be your funeral with the highest credit rate.
8. Savings, spending, investing. It may be difficult to have a high saving % early on - your salary is less but it's also when you (normally) have least responsibilities - so try to save as much as possible. Even if you can save 10%, save it and keep trying to increase the percentage as you grow.
9. Understand your salary slip: CTC, ESOP, HRA, DA, LTA - understand your salary slip or pay someone to explain it to you!
10. Set your financial goals: You may want to travel, budget for a wedding, starting your business, or retiring early. Young people are great at short term saving goals (a trip next year), or smart spending (buy an iPhone on Prime Day with 2 cashback) but terrible at long term thinking. So - think and set out for your goals!

Two takeaways that I would like to leave you with:

1. Even if you have money (many young people in metros are paid disproportionately for their age) - do you need a Mercedes or a Honda? Money should give you options, not compulsions. So, think deeply, and maximize your investing and personal finance portfolio for true financial goals (being debt free v/s saving a few lakhs under a tax break).
2. The future is here, far quicker than we think it can be here. So, think of the headiness of being independent and confident, and safe in your life. At 21, no one thinks of retirement. But, at 45, trust me, plenty of people do realize how terribly unequipped they are to have a comfortable life after 60.

Hope this post helped you out. Watch out for the 9th article in the Headstart series soon. Share these posts and leave feedback, requests, and suggestions in the comments below!

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Disclaimer: All views expressed are personal. All information copyright with author. Protected under Creative Commons. This is not a substitute for professional advice.