Imagine this – it’s the first day of the month. You got your first pay-cheque, an incredible feeling for many of us. Now, you have three options – Invest, Save or Spend. The easiest of all the options is spending. Buying gifts for friends and family, managing your day-to-day expenses, or treating yourself with that latest gadget – is an exciting option for your first salary. But, do you plan to spend your subsequent salary in the same way? If you don’t plan on spending but find it more logical to ‘Save’, then also think again. Most of the bank deposits pay you interest on savings lesser or equal to the inflation rate, giving no value addition to your wealth. Investing, however, helps you save your salary, increase your spending by giving returns on investment and ultimately grow your core wealth.
Following are the reasons, why you should always ‘Invest First’ after getting your salary:
1. Spend your earnings on investment rather than spending your salary: Why spend your salary when just the earnings from investment can help suffice your expenditure needs, keeping your investment intact. A good strategy here would be to invest in small amounts continuously that can eventually result in what is referred to as ‘the snowball effect’, in which small amounts gain in size and momentum due to reinvested earnings. Such grown investments, over a period of time, starts giving you earning equal to your salary itself.
2. Developing a habit of Planning and handle emergencies: Before investing, make sure that you have 3 to 6 months of your income readily available in your savings account. This ensures that in the case of emergency you shall not rely on selling your stocks or breaking your fixed deposits. Moreover, make sure you own proper insurance on your assets as well as on your health before you start investing. Thus investment planning not only helps you in your wealth growth but eventually helps you develop a mindset towards a planned approach to non-financial matters in life as well.
3. Tackle Inflation: This rise in prices of essential commodities is called “Inflation”. An investment giving a return of 8%, when inflation is 8% is doing nothing but keeping your money where it was. Moreover, if your salary is not growing by 8% year-on-year, you are in fact experiencing reducing in salary. Investment in more mature products like mutual funds, ETF, ELSS to name a few, not only gives you security but also helps you to gain a lead over inflation rates.
4. Become a Millionaire: You don’t need to be lucky to become a millionaire in your retirement years. The only things you need is a minuscule portion of your paycheck and an understanding of compounding. Compounding is an essential concept in investing and refers to a stock (or any asset) generating earnings based on its reinvested earnings. Suppose you invest Rs 10,000 every month from your salary into equity growth fund for 25 years (Rs 30 lakh). At the end of the period, you can earn between Rs 3 crore and Rs 25 crore. This is the power of compounding. A good rule of thumb is to invest 20% of your salary into compounding assets.
5. Reduce the average stock purchase price: ‘Rupee cost averaging’ simply means that by investing the same amount each month your average purchase price will reflect the average share price over time. Rupee cost averaging reduces risk due to the fact that by investing small sums at regular intervals, you reduce your odds of accidentally investing before a large downturn. By putting a fixed amount of money into a stock each month, you can lower the price you pay for your shares, and thereby make more money when the stock goes up, due to a lower cost.
6. Save on taxes: Government taxes you but it also gives you options to save your taxes. Take advantage of 80(c) for sure and other common tax savings instruments like Equity-linked Saving Scheme to save on taxes
7. Plan your Security: Investment into insurance products like life insurance and health insurance, helps you carelessly focus on your career. A premium of Rs. 3000/- for 5 lakh cover will include jewelry, home appliances, furniture, against theft, fire, and natural disasters.
8. Avoid following into Debt traps: The new-found power of salary develops an urge to start buying personal loans, take credit cards, take high EMI on buying a house, purchase cars on loan and the list goes on. It’s only when a major chunk of your salary is consumed by loan repayments, you realize the importance of investing. Instead of paying EMIs from your salary, a far logical approach would be to link your EMIs with return on investments.
9. Develop a financial acumen: Most of us would like to have a place we call home. The question you have to ask yourself is, do you need to buy one on EMI, or would you want to stay in a rented place? With a developed financial acumen, you will start realizing that paying an EMI is a far more logical way of handling your finances. You would start investing, to link your earnings with the house EMI for better financial management.
10. Make the right career choices: With a developed financial acumen, you would start calculating the amount of money you would require at the time of retirement. You would start cutting down on your extravagant dinner bills to plan your kids spiraling cost of education, retirement luxuries, and upcoming child marriages. With a systematic investment into products like SIP Mutual funds, you might even end up having enough financial resource to start your own business.