One of the most common things that young adults feel, when you’re stepping into managing your finances, is uncertainty. I’m sure you’ve been in several situations where you’ve just wanted to throw your hands in the air and say “I wish for some more things we wish schools taught us”.
Learning finances the hard way is a common experience, and many of us at StuCred have been through it, so you’re not alone. So we went around, asked the StuCred family what they wished that schools had taught them at an early age – and here’s what they had to say.
Many people don’t learn about the power of compounding until they’re well into their financial journey, and they often wish they had learned about it earlier. When you invest money, and not withdraw anything from it, and you keep it invested for 10, 20 or 30 years, the money you invest literally grows exponentially.
For instance, say you’re investing 500 rupees a month, every month for 20 years, at an expected rate of return at 12% per annum. You would have invested a total of Rs.1,20,000 rupees from your pocket, but thanks to the power of compounding, it has now become approximately Rs.5,00,000!
That doesn’t stop there. The Rs.5,00,000 – which took 20 years to achieve, is achieved literally 5 years later – as in 25 years, your investment is worth Rs. 10,00,000! By year 30 – your investment is worth as much as Rs.18,00,000 – even though you’ve only paid Rs 1,80,000 of your pocket. All this, from just Rs.500 for a month, every single month.
As you can see, the earlier you start investing, the more you can reap the benefits of this superpower called compounding. We’ve explained this in detail in another blog, titled the benefits of compounding here!
When you get your take home salary credited in your bank account, or when your parents give you your pocket money – the 60-30-10 is the rule that you should start applying to make the most out of that money.
60% of the money that you earn should go towards covering the necessities that you require to function. Food, clothing, stationery, hostel fee, mess fee, etc should be paid off from 60% of your money.
30% of your money should go towards luxuries, and nice-to-have items that you wouldn’t need to function. This could be the fancy dinner once in a while, or the emi payment for the phone that you’ve always wanted to purchase, among other things.
The 10% – should always be allocated towards savings and investing.
Saving at least 10% of your income on a regular basis will ensure that you are covered in all angles.
60% of your allowance is not covering all your necessities? Check out this comprehensive list of sidegigs that allows you to earn money as a college student. (Link after it’s published)
Once you start earning money as an adult, you are going to have to pay a portion of your salary as taxes. While paying your income tax, the government permits the deduction of certain expenses and investments from your income calculation.
For example, lets consider you have a home loan or an education loan the interest you pay towards it is deducted from your income. Additionally, if you invest in ELSS, health insurance, or life insurance, those payments are also deducted from your total income.
You will not need to pay any tax if your income, after all these deductions don’t cross Rs. 5,00,000!
Salary vs CTC
The salary that you receive in your bank account on a monthly basis is not the same as the monthly compensation that you’d discussed in your interview! For instance, should you earn a compensation of Rs 6,00,000 per annum. But you might think that you’d be receiving Rs.50,000 in a month. However, that’s not the case!
You may only be receiving Rs. 40,000 in a month after deductions for taxes, provident funds, insurance, training allowance and the million other things that the company will be paying for your benefit.
Keep in mind that your salary is only a portion of the total cost to the company. And it’s crucial for you to comprehend the amount you’ll receive after deductions for taxes and other expenses.
Utilisation of Loans and Credit
We’re living in a country where loans are always looked upon as a necessary evil. However, over the last decade, the credit taboo has slowly started to reduce a lot. However, since many of us are still adjusting to the idea of credit, the misuse of credit and the subsequent destruction of our financial stability is a major concern.
One of the reasons that we’ve started this blog, and eventually a workshop (stay tuned!) – is to bring awareness of how you can use credit to your advantage. Using credit wisely, and building a credit history as early as possible is a crucial step towards achieving your goals as early and as easy as possible.
“But, I’m just a Student – I don’t have a credit card to start using credit” – that is where we help you out. We give you small loans, with 0% interest, that helps you build your credit score, and manage your cash flows better. For more details, visit StuCred’s website here.
Speaking of managing credit, an important part of your financial life is going to be your credit score. In India, the CIBIL score is the golden standard. And if you want low-interest, long term loans – you should have a very good credit score. Here are the factors that go into determining your credit score.
- Credit history – how long you’ve been availing credit is one of the most crucial factors that goes into determining your credit score.
- Repayment records – if you’ve been repaying on or before time, it will have a positive impact on your credit score.
- Number of active loans – The more is not merrier in this case – having multiple loans at the same time contributes negatively to your credit score.
- Credit limit – the utilisation of credit, especially when it comes to credit card utilisation plays a non-insignificant role in the determination of your credit score.
Budgeting and Planning
Planning is the first step to financial stability. Whether you’re looking to curb your monthly expenses, assessing the different options available for you to save up for your retirement, or even the long overdue vacation that you can’t ever seem to afford, planning is the most important element that you’re missing out on. Be accountable to yourself, prepare a budget, and attempt to stick to it as much as possible.
Create short-term, medium-term and long-term financial goals, and attempt to build your budget around it – to ensure that you are using money effectively.
These were some of the important lessons that we wished were taught in our schools. Did we miss out on something? Do you want something else to be discussed on the blog? Do let us know down in the comments!
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