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I am 25, and just got my first job. How should I plan my finances?

When you are young, even starting to think of planning your finances is half the battle won.

When you are young, even starting to think of planning your finances is half the battle won. Congratulations and welcome to the journey. Given your age, just keeping the following simple principles in mind should make you comfortable in your investing journey.

1. Start saving 30% of your post-tax salary

Though it is early, the habits you form in the early years of your life will remain with you for the rest of your life. Learn to live within your means. Save 30% of your post-tax salary. If you can do this for the first 3 years of your working life, it will become a habit.

2. Separate bank account for expenses & salary

Isolate your expense (and salary account) and your investment account. Upon receiving your salary, shift 30% to your investing account. When you start doing it systematically, you will learn to live within your means. You may need to say ‘No’ to a few expensive restaurant visits or wait for a discount sale before you purchase something you want – but such habits will stand you in good stead. Remember that the first car for most millionaires that you see today has been a used car. The legend goes that Azim Premji bought a second-hand car from one of his employees, well after he became billionaire.

3. Where to invest

  • Keep some money aside for your emergency needs. At a young age, this can be 3-6 months of your monthly expenses. This can be parked in a liquid fund (and not a Fixed Deposit).
  • Rest of the money can go toward equity mutual funds.
  • Make sure you invest, to the extent of your tax saving needs, in ELSS (Equity Linked Savings Scheme). You get the tax benefit and at the same time save intelligently for the long term.
  • Wait for the committed expenses (like home loan, children's education, etc), before you commit to life insurance products.

4. Beware of credit cards or loans

  • A loan to fund your home or education makes sense. Apart from these, avoid all other types of loans.
  • With the array of electronic payment systems, a credit card is not necessary, but can be useful. Make sure you clear your credit card dues on time.

5. Few quick things to remember, since time is on your side

The following table provides approximate number of years it takes to double your money across many investing avenues and to what extent it can beat inflation. The longer the time period, the more the risk levels are reduced.

Welcome to the wonderful world of investing. Working towards financial freedom may not buy you happiness, but it does give you several options in life.

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