Stick to a budget, start saving early in life

As students, most want to earn money, have financial freedom and enjoy life by spending as they like. And, when they finish college, the majority do not think of using their earnings wisely or start saving. Financial planners say most individuals consider planning their finances only once they are in their 30s, when they have responsibilities.

Take Delhi-based Geetika Chawla. She had taken a one-year break after graduation to prepare for the Certified Financial Analyst (CFA) exams. This January, she started working with a knowledge processing outsourcing firm, which pays her Rs 33,000 a month.

However, as of now, Chawla has not planned any investments. After her monthly expenses, she leaves her money in her savings account, which earns her an interest of five per cent and she seems content with this earning. Her monthly expenses add up to Rs 13,000. Since January, she has saved Rs 80,000.

Certified financial planner Suresh Sadagopan says it is quite common for youngsters not to think about saving when they start earning. "It's the first time they have had so much money to themselves, which they splurge on holidays, gadgets and so on. The last thing on their minds is saving and investing," he says.

Sachin Sam, 21, works as an assistant copy editor in Bangalore, earning Rs 18,000 a month. He stays with his parents and has no rent and other expenses to set aside for. He confesses he spends almost all his salary every month and is left with barely Rs 3,000 at the end of the month. He hasn't thought about saving and investing.

But, you should start slowly. For one, buy adequate health insurance or at least personal accident cover, ideally even if your employer provides one. Buy a cover of at least Rs 2 lakh. And, if you have dependents, do buy pure life insurance.

Amar Ranu, senior manager (third party products), Motilal Oswal Private Wealth, advises Sam to buy a term plan of Rs 50 lakh, which comes at an annual cost of Rs 5,000. The cover can be increased eventually, as his income increases. This will take care of his risks and other liabilities, if any. Otherwise, he could postpone it for now. But, health cover is a must.

Second, one should have a contingency or emergency fund. Ranu says Sachin can allocate a significant portion to equity-related products. "To start with, he can choose two-three good equity diversified funds and invest through the systematic investment plan (SIP) route, which will take care of his long-term requirements," says Ranu.

According to Value Research, equity diversified funds have lost seven per cent, but equities perform in the long term.

Work towards saving for your long-term goals like Chawla, who will be appearing for the level II CFA exams next month. For the entire CFA course, she needs around Rs 2 lakh. As she hasn't planned earlier, she would have to ask for money from her parents for now.

Vinita Somaiya, senior manager-research and advisory, Ffreedom Financial Planners, advises Chawla to continue keeping money in her savings account.

"The best product to meet the goal will be parking this money in a liquid-plus fund, which invests in money securities and is quite safe. They will give her pre-tax returns of 9.7 per cent," Somaiya says. From the Rs 20,000 Chawla saves every month, if she had invested Rs 10,000 in liquid-plus funds since January, she would have made close to Rs 55,000.

As she will have to appear for the CFA level-III exam, she could invest some money in equity funds to save for it or other future needs.

Sam wants to purchase a bike in the next two to three years, for which he says he will be taking a loan.

"There is no need to take a loan; instead, if he can invest Rs 2,500 per month in a recurring fixed deposit of banks as interest rates are very lucrative right now or better still, in an equity diversified fund for the next two years. The corpus will take care of his funding requirement," says Ranu.

Also, the likes of Chawla could do some tax planning -- she earns over Rs 3 lakh. Many just do it at the last minute and end up having investments they do not require.

Stick to your budget from the start. Save and invest early in products you understand and require. Starting to save early will give you the advantage of compounding.

The more you postpone your investments, the more you will have to save going forward to build your corpus.