Have you done with your academics? Are you ready to face the real world? Have you started earning? If the answer of the above 3 questions is “YES” then this article is for you. As the title suggests, 7 Things you must know before you start earning in India, here is why you must know these things at the early stage of your life?
Financial literacy is the subject nowhere is taught in school or college. Once you start earning and progressing in your career, you will learn some of the lessons in a hard way. Most importantly, by that time you have already committed the mistake. Now the only thing left is the regretting on that mistake.
So it is better to know these things before you start earning in order to have a peaceful life. Making money is good and essential, but more importantly how and on what you spend decides your financial future.
So without any further “Gyan” let me explain these points in a simple language.
7 Things you must know before you start earning
Taking home loan
As soon as you start making some decent money say Rs. 50000/m, your family and friends will ask you to buy a house for yourself. It is even more tempting if you are living in a rented house. The marketing strategy ” Why pay rent, pay EMI” will make you think of owning a house at the early stage of your life. Some are buying a home just to ensure that they get married as in India, having own house is a big criterion for getting married. No parents will give you their daughter if you don’t possess any real estate in your name.
Home loan is the biggest liability and you will be trapped for the next 20-30 years. On the other side, jobs nowadays are not secure. Artificial Intelligence may take away your job and you will be in a big trouble if you have hefty EMI to pay.
Here are the facts about the home loan:
- Till the time you pay home loan EMI, it is not your house. Even if the purchase agreement is made in your name. you have to mortgage your house against the home loan that you have taken. In other words, you are still a tenant paying a rent to the bank instead of your landlord.
- You are buying a house thinking that it will appreciate in the future and you will have an asset. Remember, the house in which you are living and using it for your own self is never counted as your asset. I have purchased a house worth Rs. 20 lakhs 10 years ago. Today the value of that house is let say Rs. 70 lakhs, but it is of no use to me. As I am consuming that property for my own use.
Secondly, the rate of appreciation is not so high as compared to the overall economic growth rate. So with the increasing inflation and cost, that Rs. 70 lakhs is as good as Rs. 20 lakhs of ten years ago. So actually, you are getting nothing. It is just a fancy number that you keep saying to yourself.
If you want to buy a house, buy it with your own money. Now you must be thinking that How can I buy a house with my own money where I don’t have any? I would suggest you earn more and save more. In a few years, you will surely be able to buy a house with your own money.
We start thinking in direction of spending money as soon as we start to earn money, rather we should think about increasing our income and savings in order to have a wealthy life. The story doesn’t end here. Most of us don’t calculate the cost of acquiring a house. The registration cost, decorations, furniture cost, big TV screen and so on. In some metro cities like Mumbai and Delhi, builders are charging extra 5-8 lakhs as reserved car parking. This cost would sum up to more than 10% of your buying price. So you also have to plan that EXTRA 10% over and above the price of your house.
I have seen people taking another personal loan to fulfill these requirements. Which is again a bad decision. It will only sink you deep into the debts and you keep on paying interest every month. You will have to residue amount to plan your future financial requirements like child’s education, their marriage, your retirement plan and so on.
Another interesting aspect of buying a house is to reduce the tax burden. In India, you are getting a tax benefit on the interest you pay on the home loan and capital portion as well. People are taking home loan thinking they are saving tax on their income, but in reality, they are paying interest which is higher than the tax benefits.
There are so many ways to save tax. And believe me, those options will give you higher returns like investing in ELSS funds which will give you more than 12% returns, and sometimes higher if you are lucky. Rather than taking a risk on a home loan, why not take a risk by investing it into ELSS funds? The probability of losing money is lesser in ELSS while in the home loan you are Sureshot losing money in the form of interest you pay.
2. Buying a Car
Unless you travel a lot or you are a millionaire, a car is the worst financial decision. It is even more, worst if you are buying a car on a loan. You are going to lose a lot of money in the car. Secondly, driving a car in the metro city is like having a nightmare. As I mentioned above the parking cost is as high as the price of the car.
I have seen people who are paying a higher amount for parking space that of the price of the car itself. That’s utter stupidity! People are thinking they are living life, but they are dragging life. I am married or going to be married soon so I should buy a car to show my success.
I must have a car to show off how much I am earning and capable off
As if cars have become a barometer for one’s social status and success in life.
I have a family with 2 kids, Car is now a necessity for me. Well, there are many other options like public transport, cabs, metros, buses etc. But we feel ashamed of traveling in the public transport. As it is affecting our social status.
3. Credit Card
The first thing a person will buy is a credit card once he/she starts earning. I had a friend who earns Rs. 40000 and spends without thinking on the stuff he actually didn’t need. He was purchasing new clothes, latest gadgets on credit card EMI. Soon he broke in heavy debt.
I have seen people are buying stuff they don’t need but are still buying just because there is some discount offer. They don’t realize how much they have spent until they get their credit card bill. Shopping stuff has become an obsession for them without realizing the amount they are spending.
Purchasing with a credit card is running ahead of time. You will surely gonna have a problem if you don’t have any control over your credit card spending.
Have you ever try to know how credit card companies make money? They are making money not because of the people who use credit card diligently, but because of the people who spend more than they can afford and end up paying huge interest. For credit card companies, defaulters are their real customers, not the person who uses and pay bill regularly.
They lure you with their discount offers and cash back offers to spend more and more. This is how they make real money. The credit card is the business of lending money at the interest rates no one can afford.
As a youngster, you will surely fall for the discount offers and cash backs. Here if you don’t have control over your spending, you will be in a big trouble. I have seen people having 4-5 credit cards and all are having heavy dues. They are transferring outstanding balance from one card to another card just to avoid making payment. It is a vicious circle of debt. Or they pay only minimum dues amount. In such case, the interest levied on the outstanding is as high as 36% per annum i.e. 3% a month.
4. Expensive Gadgets
What comes first in your mind when I say “expensive gadgets”? It’s a mobile phone, right?
Yes, In today’s world everyone want to have the latest mobile phone. Rather they want to flaunt with a latest mobile handset. The cost of the good quality smartphone in India is somewhere 20000 to 30000. On the other hand, the average life of the smartphone is around 2 years. The phone will be either outdated due to new model has come up with few tweaks and upgrades or is not usable due to wear and tear of the use.
Have you ever try to calculate the depreciated cost of such gadgets? It is as equal as the cost of the milk for an entire month for a family of four. I have seen people having a rat race for the latest gadgets, especially in your initial days of career the competition between you and your colleague for having the latest mobile phone is intense.
Every day there is a new mobile model launched in India with a few upgrades. These models are made to last for just 2 years. The hardware or the software will become outdated in just 2 years and your phone starts hanging. You will feel to upgrade to a new latest model without understanding that there is a huge cost involved.
Have a clear idea on Why are you spending? Youngsters are calling this “living life” but I call it an utter stupidity of buying a gadget just to win a race or to show off!
5. Save Tax
Understanding the Indian tax structure is one of the most complex in the World. That’s why there is very few Chartered Accountant in India, I suppose! At the early stage of the career as your salary or earning is low, you might not fall in the tax bracket. But as your earning grows, you will have to pay taxes. There are huge numbers of taxes in India and criteria for calculating the eligibility is very complex things that’s why most of us have outsourced it to our CA.
I would urge you to understand the tax structure even if you are not from the commerce background. There are many causes under which you can save income tax. Sit with your CA, list down all the tax benefits, check which are applicable to your current salary structure. There is no harm in learning the basics of the tax structure. Afterall it will save a lot of your money every year.
There are many free websites available out there to understand the income tax rules and its applicability in various scenarios. You will have to learn this only once, after that you will just have to be updated every year as the new rules being introduced or existing rules are changed by the government.
At least you should know the tax slab applicable to you and various exemptions under which you can save income tax. Believe me, it is not that hard to understand as it sounds to be.
To reduce tax, invest in ELSS funds, not in home loan.
6. Buy Term Insurance Plan
Our elders are guiding us to save money from your salary at the initial stage of our career. What they also suggest is to take Life Insurance Policy to cover risk and as an investment option. Here is the big catch. Never club insurance with investment. If you want your life to be covered against any unforeseen event, go for term insurance plan ONLY.
There are various types of term insurance plans available in the market to confuse you. finding the best term insurance plan is a big task. You should at least opt for the ideal policy term i.e. Your retirement age – your current age.
Here is the checklist for shorting the best term insurance plan.
- Check the claim settlement ratio
- Check and compare the premium of various companies
- Check additional riders (avoid one if you don’t need it)
- Enhancement of policy amount
- Charges and Fees
- Check what is not included
By taking a term insurance plan you are securing your family against financial crisis in case of any unwanted thing happens to you.
Also, I would suggest you take care of your health on a regular basis. Because you can buy a car, house but you cannot buy good health. You have to maintain it on your own. Otherwise, you will end up paying huge medical bills and all your financial goals will be on a toss.
7. Take Risk, Get Rich
Start early if you want to create a wealth in a long run. At an early age, the compounding works best for you. Invest in equity which gives you the best returns in the long run as compared to any other investment avenues. If you don’t have time to sit in front of the stock market for the whole day, delegate the task to experts.
This is where mutual funds come in picture. Buy mutual funds on a regular basis via an automated mode called SIP. The equity mutual funds will fetch you around 15% returns in a long run which is quite enough to meet all your financial goals. You should also diversify your investment portfolio among other options like gold, real estate, bank FD etc. Here is the list of the Best Mutual Funds for a various category.
There is a distinct advantage of starting at an early age. You will have to invest less if you have started investing at an early age.
Whatever you do, wherever you invest, invest with a clear purpose and time horizon. Track your investment on a regular basis to check whether you are on track or not. Change between the options as and when required.
A well-diversified portfolio can help you create wealth and help to fulfill all your dreams.
First twenty-five odd years we are investing in our academic so that the outcome of those twenty-five years will help us to survive and succeed in our life. There are so many other factors which we may not know at the early stage of life. Points mentioned above are derived from real-life examples including myself. So these are tried and tested points you must know before you venture into your professional journey.
If you have any different points than above or experience, please share it in the comment section below.