Yohann Pereira's first monthly salary of Rs 15,000 was spent in paying his exorbitant mobile bills and other personal expenses. This advertising sales executive with a home décor magazine did not know much about savings and tax planning.
Saving or investing was the last thing on his mind. "I wanted to start investing. But I neither had the time to research nor had read much about investment options. The little savings I had were in a bank fixed deposit where it earned me returns of 10 per cent," he said.
Pereira, a greenhorn in the investing world, learnt it the hard way when his interest income from fixed deposits was added to his income and taxed.
Pereira's is not an isolated case. While most start their careers in the early 20s, very few aggressively save or invest. When they actually do so, it is more out of peer pressure a 'my friend/colleague invested and, made money in the stock market' kind of reason.
Take Kshitij Chincholikar, who had to cough up Rs 25,000 as tax because he did not invest any money under section 80C. "After this initial hit, I started investing but only in tax-saving instruments. But I still feel I can manage my investments better," says Chincholikar.
There are lessons to be learnt from both Pereira and Chincholikar. Here are a few important ones:
Lack of awareness: Most people starting their careers feel liberated that they are finally earning money and, can actually spend it without seeking it from parents. They forget several important things, saving for the future, creating a retirement corpus and taxes.
While there is a tax deducted at source (TDS) by companies, income tax returns need to be filed. Simple things like investment declaration forms - investments one intends to make during the year to get advantage under section 80C - are filled up hastily. This often leads to last-minute scrambling or much-smaller pay packets during the month of January-March.
"Unfortunately, there is always a mad rush to invest towards the end of the year. As a result, people choose investments haphazardly and end up investing in the first tax saving product that comes their way," says Amar Pandit, director, My Financial Advisor.
Confusion between investment and saving: The money in your bank account is not investment, neither does it give you tax benefits. Instead, there is a tax on the interest income, which is 3.5 per cent one of the lowest rates of return among all kinds of instruments.
It is important to make sure this money is invested somewhere. Besides instruments under Section 80C, which gives tax benefits up to Rs 1 lakh, look to invest some part of the money in different instruments. Start small, but start sure. And you will seldom be stuck on finances.
I am a financial whiz: Armed with a business degree, many management graduates start dabbling in stocks. Take, Praneeth Karkera, an MBA graduate, working with a market research firm. Karkera started trading when his father gave him some money and asked him to buy shares of a certain company. Karkera's modus operandi: Advise from a few friends to understand the basics of trading, such as opening of a demat account, numbers to watch out for and, he hit the button.
Soon, he was addicted to trading. High profits, based on 'tips' from his friends, in the first few months had him hooked completely. Unfortunately, the bubble burst and he was soon in heavy losses.
"I made the basic mistake of investing in shares of B-group companies. The shares were cheap and gave high returns. But when the market went down, I lost all my money, as these companies were not fundamentally strong," says Karkera.
Sandhya N Bathwar, another victim of the 'tips' syndrome is more cautious now. "I have stopped buying stocks of smaller companies which give returns only in the short-term. Now, I invest only in fundamentally strong companies. I would rather buy two to three shares of an Larsen & Tourbo (L&T) vis-à-vis buying 100 shares of a lesser known company."
Financial planners would always tell you to look at stocks when you understand the investing game a little better. For starters, keep it simple: Pick up good equity diversified funds. Preferably, start through a systematic investment plan (SIP). Gradually diversify to sector funds and other instruments. Stocks should be the last option.
Insurance is not investment: For one, in your 20s, you do not need life insurance. If you do have dependents, purchase a term plan. What is required is a health plan. And even if the company provides one, having one separately will help.
Purchasing a unit-linked insurance plan is a strict no-no. While agents will tout these as tax savers, an investment-cum-insurance option and, sometimes, even as mutual funds, it's best to stay away from products that will lock your funds for quite a few years. And may not give great returns vis-a-vis other market-related instruments.
I earn, I can spend: Yes, credit card companies are lining up for your attention. They have to you are at your most gullible stage. Since they charge you at the rate of 40 per cent a year and above, that small iPod or latest cell phone on their card will ensure high interest earning for quite some time. They even offer cash on tap. But it comes at an even higher cost.
For most, credit cards are an important addition to their wallet. But using it well is also important. Use it but don't roll over. If you have to roll over, try to pay back as soon as possible. The same applies for car and personal loans.
"The tendency to pile up equated monthly installments (EMIs) in this age group is quite high. There have been instances where EMIs have accounted for as high as 80 per cent of the take-home salary for people," says Nirav Panchmatia, founder and director AUM financial advisors. Little debt, decent investments and proper tax planning - following these three basic principals will mean all's well. Try it.
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