On a weekend, while Omer was busy attending calls of friends to fix a meetup venue, his father asked him to meet in 5 minutes in his room. 

 Dreading his father’s tone, Omer knocked at the door to enter his father’s room, a bit apprehensive of what was about to come his way.

 “Omer, don’t you have financial discipline? Don’t you know what to do with your salary? How to spend your salary wisely? Or do I need to spoon-feed you like always?” asked his father. 

 In a low voice, Omer said, “I am sorry Pa, was not in my knowledge that you were getting agitated with my behavior concerning my finances. I am about to begin my investments soon; do not worry about that.”

 “Son, how immature you are? Besides watching YouTube videos to know how to cross a specific level of your PS4 game, ensure to watch some videos on how can you spend your income wisely. Follow and watch videos of high-end financial advisors who recommend how should you spend your salary. Having lower financial obligation is the biggest advantage you have over your older counterpart, which provides you with higher flexibility to deal with your finances and take higher risk for your financial decisions,” remarked Omer’s dad in an irked manner.  

 Next, his father went on to explain crucial things Omer should do with his salary. 

What to do with your salary? 

 ·         Start your investments now

 The sooner you start, the faster you reach your financial goals. Waiting for the right time to invest delays your investment and makes you miss the benefit of compounding. With compounding effect, your invested money gets sufficient time to multiply i.e., the generated gains earn further returns over the long term. For instance, if you begin investing now at the age of 25, you will only need to invest Rs. 7,770 per month through an SIP at an assumed annualized return of 12% to form a corpus of Rs. 5 crore by the time you turn 60 years of age. However, if you start investing at 40 years of age, you will need to invest Rs. 50,500 per month to form the same corpus in the next 20 years at the same return rate. 

·         Create an adequate emergency fund

 Before you start investing for your life goals, ensure you create an adequate contingency fund, amounting to a minimum of 6 times your mandatory monthly expenses. Doing this would help you in managing your unforeseen financial emergencies like severe illness, any accident or sudden job loss. As the need for an emergency fund is instant, you should park your fund in a high yield savings account, or short-term debt funds, as they provide the highest form of liquidity at minimal risk.

·         Build a retirement corpus

 Regardless of your income and age, retirement planning should be given the highest priority over other crucial goals like accumulation of down payment for home or car loan, etc. Avoiding the idea of early investment for retirement might either lead to accumulation of inadequate corpus or excessive burden in finances to form adequate corpus in shorter duration owing to delayed investment. Thus, begin with forming your retirement corpus right away. While you do so, make sure to factor in inflation for calculating your retirement corpus. Consider investing in equity funds through an SIP to adequately and timely gather your corpus as equities have the potential to generate inflation beating returns over the long term.

Try Kotak Cherry Retirement Calculator

·         Purchase adequate insurance cover

 Usually, many mix insurance products with investment avenues. As a result, you end up investing in money back, ULIPs, endowment policies etc., which fail to offer adequate cover. Ideally, insurance cover should amount to 15 times your annual earnings. A feasible option that you can consider availing is term policy. The premium in term insurance is low as compared to the cover amount. Moreover, to safeguard yourself against loss of income due to high medical expenses or disability, purchase health policies.

 “Son, just by understanding ways on how you should spend your salary and where to allocate your income, you can stay confident and gain greater peace of mind,” advised Omer’s father. 

 “Yes, Pa. You are right! Thank you for making me realise the blunder that I have been committing for the past few months. From now onwards, I promise not to behave in an undisciplined manner with finances,” assured Omer.