Mastering personal finances is one of the most basic yet important skills that helps you achieve your short-term and long-term goals. Understanding smart money management earlier makes it easy to deal with your finances responsibly in the later years, when it is necessary. The idea is to take small yet effective steps toward managing your money wisely. However, managing your money smartly can be overwhelming, especially for beginners. The most common challenge that beginners face is the lack of awareness about where to save and when to invest. So, if you have just stepped into the financial realm, here are five essential tips that will help you manage your finances responsibly:
Build Your Credit Profile
Once you have a regular source of income, the first step is to build your credit profile. Establishing a credit profile is important because it reflects your creditworthiness. When you apply for a loan or a credit card, the lenders check your credit score, and a good score (preferably above 750) shows responsible financial management and allows you to avail loans at reasonable interest rates or credit cards with better benefits. However, individuals who have never taken any form of credit do not have a credit history, which often makes it difficult for them to avail any form of credit when required.
To start building your credit profile, you can apply for a personal loan or a credit card from marketplaces like Paisabazaar by comparing multiple options and choosing the one that suits your requirements. However, it is important to make timely payments and clear your debt every cycle to build a positive credit profile.
Save for Emergencies
Creating an emergency fund is important for a stable financial life. Unexpected expenses can arise at any time, so it is important to start saving up for them as early as possible. During the early stages of earning your own money, ‘savings’ take a back seat as the newfound financial independence often leads to overspending. Hence, it is important to start saving for the future. No matter how little you drop into your savings, try to put some portion of your monthly income into an emergency fund.
To save your money, you can either put 20-30% of your monthly salary into a savings account or find ways to invest your money. You can invest your money in small fixed deposits or even start with SIPs as low as Rs. 500 per month. Once you get into the habit of saving money, be consistent with your contributions and stick to your target.
Start Early & Opt for Insurance Covers
When it comes to health and life insurance policies, many individuals overlook the benefits of opting for insurance earlier in their career. Beginners usually do not opt for insurance, as they neglect the possibility of any medical emergency at such a young age. However, investing in the right plan at a young age can be helpful and allow you to protect your finances, especially during emergencies. Opting for health or life insurance at a young age not only costs you less but also helps you save on taxes. Ideally, young age (especially in your 20s) is the best time to opt for health or life insurance, as it allows you to get a better value with lower premium. Saving on taxes due to the allowed exemptions is also an added advantage that beginners should consider.
Avoid Overspending
Financial independence often leads to overspending, especially if you are a beginner. However, it is important to spend within your means and avoid exceeding your financial boundaries. The two rules that you should implement in smart financial planning are- 1) you should never let your expenses exceed your income and 2) keep an eye on where your money goes. The best way to do so is by avoiding unnecessary expenses such as lavish vacations, impulsive purchases, or subscriptions to services that you may never use. Overspending can quickly derail your financial goals and lead to debt.
To avoid this, you should create a budget to track your income and expenses. Learn to differentiate between your needs and wants and try to limit impulsive purchases. While pre-approved offers from card issuers or lenders may seem quite tempting, it is important to understand that these are borrowed funds that need to be paid back and levy hefty charges if not paid on time. Hence, you must spend within your means and repayment ability to save yourself from falling into a huge debt in the future.
Start Planning Your Taxes
When individuals initially start their careers, many tend to overlook tax planning, assuming that their income is not that high. However, despite the income level, understanding how taxes work and focusing on tax planning are important for responsible money management, even for beginners. It helps you maximize your income and minimize your tax liability. Familiarizing yourself with various tax exemptions, deductions, and benefits is important to avoid last-minute hustle at the end of the financial year.
You can start by investing in tax-efficient options like PPF, 5-year tax-saving FDs, NPS, life insurance, ELSS, etc. that not only save you from tax but can also help you optimize your returns. However, before opting for an a tax saving instrument, you must be aware of all the related terms and conditions, such as the Equity Linked Savings Scheme (ELSS) comes with a lock-in period of three years, while only 5-year-long FDs are eligible for tax deduction. For better understanding, you can also consider consulting a tax professional to look for various tax-saving options.
In conclusion, taking control of your finances is a key aspect of achieving financial stability and success. Regardless of whether you are an experienced professional or at the early stage of your career, it is important to understand that money management is about balancing your income and savings. Hence, learning smart money management as early as possible is important to set yourself up for long-term financial well-being.
