Turning Your First Salary Into Smart Investments

Last month, my friend came to me with good news that he had landed a job with a decent salary of Rs 50,000 per month.

Today, as we discussed how and where he planned to spend his first salary, if I were to share his intentions, you’d likely be shocked. In short, what he told me was that his focus was on purchasing luxury items that amounted to more than what he would be earning per month. This essentially meant he intended to accumulate debt in the very first month of his new job.

I advised him against such a move and recommended that he start investing instead. However, the concept of investing was new to him, so I introduced him to the basics of investing, including options like mutual funds.

He responded by saying, “Sure, I’ll buy the things I have in mind first, and then invest the remaining part of my salary.” I explained to him that if he followed that approach, investing would remain just a dream, and he wouldn’t be able to do it effectively until his retirement. Instead, I suggested a secret ratio for better monthly budgeting, balancing spending and investing. Let’s explore it.

50:30:20 Rule: 

A fundamental principle for effective financial management is the 50:30:20 rule, which divides your monthly income into three categories: needs, wants, and savings. You are earning Rs 50,000 per month, allocate Rs 25,000 for needs, Rs 15,000 for wants, and the remaining Rs 10,000 for savings.

1. The Needs (50%): This category covers necessary costs like rent or home loan payments, groceries, and bills. These are the expenses you can’t do without because they are essential for your everyday life.
2. The Wants (30%): The next 30% of your income can be used for things you want to do for fun or buy, like eating out, shopping, or enjoying leisure activities such as gym memberships, streaming services, and personal grooming.
3. The Savings (20%): Set aside the remaining 20% monthly as consistent savings. While you don’t have to invest all of it in mutual funds or any other investment option, consider putting some into an emergency fund. The important thing is to save at least 20% of your income regularly.

Read: 30:30:40 Rule Of Investing

Building Your Investment Portfolio 

Now that you’ve allocated a portion of your income for savings, let’s delve into building your investment portfolio. I suggested to him, that if you are scared about your invested money and not sure about it, then consider starting with a minimal amount and gain confidence in mutual fund investments first.

1. Begin Small: If you lack a lump sum for equity investments, start small with a Systematic Investment Plan (SIP). Most mutual funds allow you to initiate SIPs with as little as Rs 500 or Rs 1,000. However, consulting your financial advisor and considering higher SIP amounts say Rs 10,000 per month can lead to more substantial returns, especially when compounded over longer periods like 7 or 10 years.
2. Diversify with Equity Funds: As you become more comfortable and confident, diversify your portfolio with equity funds. Flexi-cap funds offer dynamic and rewarding options.
3. Decide a SIP Amount: If you opt for SIPs, set the right amount. Higher investments, when possible, harness the power of compounding over time. A SIP with a larger amount can be remarkably effective, especially if maintained for extended durations. As your income grows, consider increasing your mutual fund investments.
4. Flexibility of SIPs: SIPs offer flexibility. You can adjust your instalment amounts as your financial situation evolves. If you are uncertain about your ability to invest in mutual funds monthly, consider switching to a quarterly SIP frequency.

In summary, deciding how much of your salary to invest in mutual funds hinges on several factors. As a general guideline, allocate at least 20% of your income for savings and think about directing a portion of it towards mutual funds first. The earlier you start this financial journey, the greater your potential for growth.

Moreover, by adhering to sound financial management principles and seeking guidance from experts, you can optimize your mutual fund investments and lay the foundation for a more prosperous financial future.

My friend understood the concept properly and agreed to follow the same. We hope you also understand and will follow this rule to maximize your wealth.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.