First salary or first income is always a beautiful feeling. Isn’t it? Any amount but the happiness or confidence it gives is immense. My first salary was a happy moment for me. When I started my firm, we waited around 4 months to get licensing & set processes. But when we got our first fees after a gap- same feeling of freedom was felt by me. Well, we were pretty settled, but what about the beginners? How to spend first salary? There is a definitely lot to be done when one start earning, but where is the entry point? What are the pitfalls and care one must follow? Let’s today revisit these points in detail.

This guide on “How to spend first salary” is not confined to beginners. It is a fact-check for many, who have been earning for long but still need to cover the basic gaps in financial planning.

The steps of spending or utilizing I would say, the first salary depends on the exposure to risk. To simplify, I would say a person should decide based on his requirement. His immediate requirement may be covering his life as he has responsibilities or starts allocating money for some near-term goals. Let us see how this can be done.

The dilemma of salary- Spend or Save

The first instinct is to just book the money and spend on things you have wanted for long with your own hard-earned money. I don’t get surprised when I find males booking a Bullet (bike) or females booking a make-over session at a celebrity salon. If you think this is necessary go ahead otherwise if you sacrifice here you feel bad. The best way could be to postpone till you have full control.

Once the euphoria goes away, you have to start thinking ahead. This can be done by covering weak areas with investments and proper insurance. When it comes to investments it comes to goals and products. And, when you think of insurance it covers both life & health.

The sooner you begin saving and investing your money, greater the returns  as you get more compounding periods. Also with increasing age comes greater responsibilities and a reduced budget.

The aim is to become financially secure.

3 things to focus before you spend your first salary

Now since you have started earning, 3 important things will need your focus:

• Income Tax

Depending on your package or income for that financial year, you may be liable to pay income tax. Spend time with your Financial Planner or company accountant /CA and understand how salary calculation is done. Each company has flexibility to help employees save income tax by dividing salary in different heads like medical, LTA & Allowances.

This is also important as there are a lot of investments that can be done to save tax outgo. These investments have bearing on your paying capacity and future earnings. Many time we meet investors who hurriedly invested in a costly life insurance which has reduced their investment capacity and giving very low returns. Just be cautious and consult before signing any investment cheque related to income-tax savings.

• Credit Score

During the early years, the feeling of earning your own money and spending as you like can be costly. This happens when you buy too many wanted/unwanted things or resolve to credit. It’s a common tendency to revolve your credit card dues or delay payments without thinking of the consequences.

Credit Cards, Personal Loans, Finance on Gadgets/White Goods & Overdraft all can affect your credit score and hamper your ability to take a loan (such as home loan or education loan) when you really want to plan for life.

The best way is to learn to live within your means. Budget Budget Budget… 3 keys to avoid debt.

• Starting early

Think about your future goals and set aside some money each month from your salary right from the beginning. Expenses come later, first comes the targeted savings. The longer your money stays invested, the higher your returns due to the power of compounding.

Insurance Comes before Investments – But Avoid Getting Duped

If you do not have huge money/assets to back, you need to protect some pitfalls related to your life and health.

Be aware that when you are qualified to earn, you become an economic commodity. Your earning capacity will be important and it could go away or get reduced due to death, an accident or serious sickness. So you need to cover it using insurance. You should have an adequate Life Insurance Coverage or a Term Plan, a Mediclaim Insurance (Other than what your employer is providing) & a personal accident cover.

Over the years, medical costs have been on the rise, and a health insurance cover is a must-have now. The earlier you get it, the better. When you are younger with no pre-existing diseases, you pay a lower premium. This is applicable to life insurance too.

Insurance has cost attached. Someone (insurance company) is covering your risk. So one need to check the cost. Also, this industry is driven using brokers/agents (not yous, but insurance company’s). Not everyone offering insurance is a friend or a foe. Just understand your requirement and match the offering before signing the premium.

When you have suitable secured your earning capacity through proper insurance, you can set yourself on Wealth Maximisation journey now.

Diversify Your Investments – Follow Asset Allocation

When you begin earning, your parents, boss, friends, and neighbors are likely to suggest putting some money in a bank fixed deposit or an LIC policy. What they won’t tell you – inflation factor. The returns from these two aren’t so great. But they won’t admit that.

You should consider investing in other avenues as well. You can diversify through real estate, gold (physical or ETF), PPF, NPS, Mutual Funds & Direct Equity.

Equities are one option that can give a boost to your investment portfolio but needs a larger horizon and risk capacity. You can look at equity mutual funds. There are tax saving funds as well, and you can invest via a Systematic Investment Plan (SIP), which helps you plan and save for upcoming goals.

Each of these asset classes has different features, requirements & returns. A solution can be worked out using these options.

TIP: You know, 95% of returns are the result of Asset Allocation (choosing right assets and rebalancing them periodically). Rest 5% is your choice of schemes, returns generated, Timing of investments or luck.

Last, not the least- Consider Professional Help

In case you are not inclined or investment is not your favored field, it’s best to start working with a trusted Financial Planner from the beginning itself. Financial Planner is also an expense but a professional can make a lot of difference when he operates from the beginning. You may ask investor’s who are taking professional help now. So if you are starting to consider hiring one.

Hope this not will help you to focus on the starting point of a financial journey. A little help will help you start the right way. Hope you found the right answers for how to spend first salary?

How can we help? If you have a question, you may direct it to me through email or the “Ask Us” page. Also if you have point regarding the topic, please feel free to write it in the comments section.