How should you go about managing your first salary ?

So you got your first salary? Now what next? How should I manage this? Should I save / Invest / Spend all? These are some of the basic questions that comes into mind of young person who has just started earning. For persons who earn their salary from employer, here are the things that you should think of :-


1) How much tax do I need to pay out of my take home salary earnings?
- This is so important because you need to know what will be the net income in your hands after deducting the tax. Here is the overall view of income tax slabs for Assessment year 2011-2012 -

Income Tax Rates/Slabs for A.Y. (2011-12)

Slab (Rs.)	Tax (Rs.)
Less than 1,60,000	Nil
1,60,000 to 5,00,000	(TI – 1,60,000) * 10%
5,00,000 to 8,00,000	34,000 + (TI – 5,00,000) * 20%
Greater than 8,00,000	94,000 + (TI – 8,00,000) * 30%

TI = Gross total Income (Taxable Income)

Women aged 65 years or less

Slab (Rs.)	Tax (Rs.)
less than 1,90,000	Nil
1,90,000 to 5,00,000	(TI – 1,90,000) * 10%
5,00,000 to 8,00,000	31,000 + (TI – 5,00,000) * 20%
Greater than 8,00,000	91,000 + (TI – 8,00,000) * 30%

Senior Citizens (Individuals aged above 65 years)

Slab (Rs.)	Tax (Rs.)
less than 2,40,000	Nil
2,40,000 to 5,00,000	(TI – 2,40,000) * 10%
5,00,000 to 8,00,000	26,000 + (TI – 5,00,000) * 20%
Greater than 8,00,000	86,000 + (TI – 8,00,000) * 30%

After calculating you gross total income (taxable income), you will need to pay the tax on it as per above mentioned tax slabs. There are legal ways to reduce your taxable income as per the law for various investments you do.  I will post detailed description in later posts. Here is the overview of the deduction / Exemptions that you can avail of -

Under Section 80C – Maximum of upto Rs. 100000 exemption can be availed. Deduction of an additional amount of Rs. 20,000 allowed on tax savings, for investment in long-term infrastructure bonds as notified by the Central Government.

There are further ways to get exemptions /deduction from your taxable amount. Will post in another topic.

2) What are my goals?

- Here you should plan where you want to go? If you have no goals set, then you will be randomly investing and as your goals in life come along the way, you fulfill them. It can happen many times that you are not prepared and some important goals is nearby, however you didn’t give much thought to it from many years or months and at the end you have to take decisions in hurry, which you don’t want to take. By setting your financial goals in advance you can get a good idea of what lies in future and start preparation for it (Goal of financial planning).

Goals can be 

1. Short term (< 3 years) such as buying a car, marriage expenses, sibling’s marriage, etc.2. 2. Midterm (3 -6 years) such as vacation abroad with spouse, initial child’s expenses, buying a house, etc.

3. Long term (7+ years) such as children’s education, retirement corpus, etc.

So looking at it, it is always advisable to have such goals planned and in place so that planning to achieve these can be proceeded.

A good list of resolutions that you can make – it is really useful. Find it here – Financialresolutions

If you manage to make this up, it is almost half the battle won. Now next is planning to achieve them one by one by proper and prudent investments.

3) Create an emergency fund –

This is by far the most neglected area. Young people don’t think about it and keep on spending lavishly and so they end up in delaying the achievement of their goals. Emergency fund is keeping a good amount of corpus (Normally 3-5 times your monthly salary) in bank savings deposit account / liquid fund so that in case if any contingency (Such as closure of company and you end up losing your job) arrives, you should not be in trouble to tackle it.

It gives you cushion to cover up your expenses in case you lose your job. So ever neglect this fact.

4) Buy an Insurance – 

This is important if you have dependents on you (such as wife / children / parents).  It provides the risk of loss due to death or incapability of major income earner in the family. The risk is covered by the company for the insurance claim bought by the insurer (upto the amount of risk cover bought by bread earner). And in future articles we will see how term insurance plan is far better than the traditional policies.

5) Take a loan instead of lump sum payment for buying car / bike –

If you are a Businessman or a professional and if you plan to buy car / bike, look at this as better investment. Taking loan instead of lump sum payment has certain advantages. You will get possession of the car / bike and you will have to pay small amount in the form of EMI (Equated Monthly Installments) for certain fixed duration.

The interest components in EMI payment can be deducted from your taxable income under profits and gains from business or profession. So in a way it helps to reduce your tax liability. 

6) Investing in postal deposit schemes - 

To earn fixed interest payment along with tax saving advantage on your investment, you need to allocate your money into postal deposit schemes provided by India Post. there are schemes such as National saving certificate, Time deposit, Public provident fund (mainly for retirement) which qualify for deduction under section 80C. Investing the maximum allowable amount (per year) in Public provident fund Rs. 70000 at the beginning of every financial year, it will be a benefit as more interest could be credited to your account. So you can take advantage of this.

  

These are the points I wanted to cover in this article. This topic is incomplete and it is left for suggestions if anyone knows more ways to add things, please add those into comments section. And do visit here as more important stuff is coming your way.. :)