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First Salary Advice to Make You Feel Secure and Confident
Receiving your first salary is an exciting experience. I still remember the thrill of seeing my first paycheck and feeling a sense of accomplishment. But at the same time, it is also important not to get carried away and make some thoughtful financial decisions which will help you on a long way. Learning effective strategies for managing expenses with a new salary is essential for a bright financial future and you should start to build your foundation from the very first. In this blog post, we’ll explore smart investing tips for recent graduates who got their first salary including methods to effectively allocate your expenses, and ways to build a secure financial future. The below-mentioned strategies will make you more confident and empowered, knowing that you’re taking the right steps towards financial stability.
Understanding Your Take-Home Pay
Managing your first salary can be an exciting yet confusing challenge. The day you receive your first paycheck, you’re planning for bright and trouble-free financial independence should also start. Here’s how you can start this exciting chapter.
- Check the Salary Statement
The first step to do is to closely analyse your salary statement. Your salary statement consists of different components such as basic salary, house rent allowance, and other perks. Understanding these elements can clarify what portion is taxable and what isn’t. For instance, in your first paycheck and thereafter you might find that certain allowances, like transport or education, are tax-free up to specified limits. It’s crucial to know these details to take advantage of tax benefits.
- Verify Against Your Offer
I need not tell you to compare your salary statement with the original job offer. But still, you should ensure that all commitments are met. Mistakes can happen, so it’s vital to verify that everything matches. If there’s any discrepancy, talk to your HR department and get a clarification or correction. Your new salary should reflect all terms discussed during the hiring process.
- Restructure Salary Components
Find out if your company allows restructuring of salary components every 6 months of year-end to optimize your tax savings. This might involve adjusting your salary components to include more tax-free allowances. For example, increasing your contributions to retirement savings can be an effective strategy for reducing taxable income. Consulting with HR or the finance team about these smart saving tips can lead to significant long-term benefits.
Monthly Budget Creation
Landing your first job often comes with relocating to a new city, brimming with excitement and new beginnings. Amidst all this wonder, it’s crucial to create a monthly budget that accounts for the extra expenditures which are inevitable. Housing rent, electricity, groceries, and transport are the core essentials that demand rigorous attention. But let’s not forget a few others like those OTT subscriptions and occasional shopping experiences that come along with the newfound independence.
Creating a budget is not just about expenses and a savings list. Understanding where the money outflow is very crucial. During my initial years, I used to maintain a logbook for all the expenses made for a day (however small it is) before hitting the bed. This habit will become a simple yet effective approach to differentiate between needs and wants. Needs are non-negotiable essentials like groceries, rent, and utilities. Wants, however, encompass personal indulgences, like dining out or shopping for that stylish jacket you spotted last weekend
Here I want to share my golden rule. Separate savings from expenses right from day one. Think of it as paying yourself first. Allocate a portion of your first salary (typically 10%) towards savings the moment you receive it. This might seem tough when you feel that the list of expenses for the month is a long one, but trust me, you will start to manage and habituate it as the future benefits outweigh the immediate sacrifices.
Imagine looking at your bank account a year later and feeling proud of the substantial savings you’ve accumulated because you learned a few effective strategies for managing expenses with your new salary.
Understanding Student Loan Repayment
Student loan repayment has been a very key component for those new graduates as well as ever perhaps for a few struggling people. Here understanding your loan’s grace period and repayment schedule is essential. Do you know that most student loans offer a six-month grace period after graduation before repayments begin? This breathing room is for you to settle down with your new job and manage your newfound responsibilities. Timing is everything when it comes to financial planning. During this grace period, your task is to know when and how much you need to repay and come up with a plan to settle your dues as soon as possible.
Importance of Developing a Repayment Plan
Creating a repayment plan may sound boring and confusing but it’s one of the smartest financial decisions you will make when you get your first salary. Many recent graduates do not take it seriously and overlook the importance of this step, often leading to financial strain. Let’s look at some data: –
The student loan debt in America has been a serious issue, with the total education debt reaching a staggering $1.74 trillion as of the third quarter of 2023. The average debt among all student loan borrowers was $38,290. While 47% of the total outstanding federal loan debt was held by just 10% of borrowers (average $80,000 or more), a majority (53%) of federal student loan borrowers owed $20,000 or less.
In India, the average size of student loans grew from ₹7,08,000 in 2018 to ₹8,95,000 in 2019. Furthermore, student loans in the ₹20+ lakh category grew six times in the 5 years from 2013 to 2018. These figures underscore the growing burden of student loan debt globally.
Set an Automatic Schedule for Repayment from Your Salary Account
One of the most efficient strategies for repayment of student loans with your new salary is to automate your loan repayments. You need to contact your bank or employer to set up an automatic deduction of EMI from your salary account. This will ensure timely payments and remove the risk of missed deadlines, late fees and additional interest charges, ultimately reducing the total loan cost. Further, it instils a financial discipline, freeing you from worrying about manual, monthly payments.
Start Mutual Fund Investing
Starting your journey into mutual fund investments with your first salary is another smart move for investment. Again, the magic lies in a SIP, short for a Systematic Investment Plan. Think of SIP as a disciplined, automated, contribution to your future self. SIP allows you to start investing even with limited funds. Imagine setting aside just 0.5% to 1% of your monthly salary for Mutual Fund SIP. Yes, it’s that accessible. The beauty of SIP is that it fosters the habit of saving and investing regularly without having to think about it constantly. Now let me tell you my story, a few years back, I casually set up an SIP for Rs. 500 every month, and during an emergency time, when I looked up my statement, I was surprised. The SIP fund had grown so large that I could not only meet my emergency requirement, but I also had enough funds to purchase a bike. You only need to set an automatic payment from your salary account every month and then, simply forget about it. Let the magic of compounding work its charm over time. Read my blog on Mutual Funds here.
Mutual funds are managed by experts who are adept with financial knowledge and the stock market, so your money is in good hands. And due to the power of compounding, the earlier you start, the more you stand to benefit.
If I can do it, so can you. Among effective strategies for managing expenses with a new salary, mutual fund investments through SIPs are goldmines. Just invest and forget for a long time.
Investing in Retirement Accounts
Similarly, one key area to focus on from the beginning is investing in retirement accounts. I am sure you will not make the mistake I did. I was just like others. Who will bother retirement when you get your first salary? The thought of retiring may seem far off, but the earlier you start, the better off you will be. The wisest decision is to plan for your retirement from the very beginning. Can you predict what will happen after 30-40 years from now? Did you ever check what will be the expenses once you reach your 60s and 70s? There are calculators available online. Retirement investments are designed to help you save for your golden years. They also offer tax advantages for you that can significantly boost your savings over time. Whether it’s a 401(k) in the U.S., a Superannuation fund in Australia, or a Provident Fund in India, these accounts are powerful tools to build your retirement basket.
How to Start Saving for Retirement Early
With your first salary rolling in, it’s crucial to set aside a portion towards your retirement. Begin by understanding the types of accounts available and their benefits. Starting with a very small amount every month, you can make a significant difference over time. If you can automate these contributions, it requires little effort on your part. For instance, in the US, there is no minimum required amount for opening an IRA, and no rules about how much money you must deposit. In India, a subscriber is required to make an initial contribution (a minimum of Rs. 500 for Tier I and a minimum of Rs. 1000 for Tier II) at the time of registration.
Taking Advantage of Employer Matching Contributions
In many countries, employers offer matching contributions to retirement accounts as a part of your salary breakup. One wise decision is to take maximum advantage of it and contribute as much as possible exhausting the full limit for this type of contribution. This is one of the effective strategies for managing a retirement fund with your new salary.
Establishing a Good Credit History
Along with all these planning, saving and investments, establishing a good credit history is also equally important. One of the many ways to do this is to take a credit card and use it minimally. You should always keep a tab on the swipe and charge only what you can afford to pay off each month. Timely repayment of an education loan also positively impacts your credit score. This three-digit number can be the key to unlocking future financial opportunities, like securing a car loan or a mortgage at favourable interest rates.
A good credit score reflects your reliability. This will become your financial report card. Now most of the countries have their credit scoring parameters. CIBIL is widely used in India, while FICO is a popular credit scoring model in the United States.
Do you know that with a good Credit Rating, you’ll get the best rates on car and insurance? And it is also cheaper to borrow money with a high Credit Score. Consistent, responsible credit usage lets potential lenders see you as low risk, which in turn, can result in better loan terms and reduced interest rates. Over time, this can save you from huge repayments.
Conclusion
How you manage your first salary will be a game changer and it can set the stage for a financially secure future. Budgeting, saving and investing are the cornerstones of all financial successes. You just need to follow these best ways to save money for the future.
Saving, as simple as it might sound, is indeed a powerful tool. And I am quoting my example. I have seen my money grow from modest investments which anyone like you can do, becoming a huge corpus over the years. But the only mistake which I made was to start it late. Do not make the same mistake as me. Plan and invest from your first salary.
I’ve found lots of great websites and magazines to help me understand the financial jargon and also great ideas and tips. So, take charge of your first salary and let it be the foundation upon which you build your financial future.
