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Building a Strong Foundation: 5 Essential Financial Tips for Beginners

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Smart money management is an important skill that everyone should master but it is easier said than done, especially for beginners who have just started earning their own money. Managing funds at this stage could help individuals effectively move towards their short term and long term financial goals, easing it for the later years when financial responsibility comes not as a choice but as a necessity. However, it is often the lack of awareness around how much and where to spend their money that leads to beginners making financial mistakes, the repercussions of which can stay on their financial profile for many years.  So, if you have just stepped into the financial realm and wish to learn how to manage your finances wisely, we have listed the top 5 financial tips to get you started:

  • Focus on Building a Credit Profile

After ensuring a stable source of income, the first step should be to build a good credit profile by getting a credit product, such as loan or credit card. But why is a credit profile important? When you apply for any form of credit, lenders check your credit score- a three-digit number that indicates your creditworthiness. A good score indicates that you are a responsible borrower and have been managing your loans in a disciplined manner. It also opens doors to more credit cards suiting your needs and loans at a reasonable interest rate. Beginners with no credit behavior or history do not have a credit score, and often struggle when the need arises to opt for a home loan, personal loan or car loan. Thus, as beginners, your first focus should be to build a good credit score.

To begin with, you can opt for a consumer durable loan or an entry-level credit card that comes with easier eligibility requirements. Once you start your credit journey, you should check your credit score regularly once every 3–4 months. You can visit online marketplaces like Paisabaazar.com.  Here, you can also apply and compare loans and credit cards, to find the best suited option for you.

  1. Start Early and Save for Emergencies

In the early stages of earning your own money, newfound financial independence can lead to a lot of impulsive purchases and other unnecessary spends. However, it takes a wise head to know the importance of saving at this stage, no matter how little money you drop into your savings bucket. For savings, ultimately, what matters is consistency and frequency, so you must focus on your savings as early as possible. For this, ensure that you save or invest at least 30-40% of your monthly income. You can invest in small fixed deposits, monthly recurring deposits, or can even invest in SIPs, at as low as Rs. 500 per month. Saving early will not only earn you good returns, but might also help in emergencies occurring because of unforeseen circumstances.

  • Opt for Insurance Covers

While a lot of people talk about investments, not many tend to focus on the benefits of opting for insurance cover as early as possible. Often, not having any dependents to look after, or the misconception that a medical emergency might not occur at this stage in life, keeps one away from availing insurance. But this is actually not an advisable thing to do, as insurance cover can save you from depleting your savings to cover the cost of a medical emergency. The 20s is actually the best time to opt for health or life insurance as your premium would be lower and you can also save on taxes, due to allowed exemptions.

  1. Focus on Tax Planning

Even when you fall in the tax slab or not, you must keep your tax planning in mind, to avoid any last-minute hustle at the end of a fiscal year. Also, you must be aware of the applicable tax liabilities on your income, allowed exemptions, benefits you can get, etc. While you must always keep a portion of your money in liquid funds, also look out for options that can help you save on your tax liability, even when they come with restrictions like a lock-in period, no foreclosure, etc. These include PPF, 5 year Tax-saver FDs, mutual funds, NPS, etc. It is better to include these as part of your monthly savings than to opt for a lump-sum payment all of sudden so as to avoid a big impact on your pocket at the end of the year.

  1. Avoid Borrowing Funds or Overspending unless Absolutely Necessary

Last, but not least, you must ensure spending within your means and not beyond that. The sense of financial independence might often promote the need to fulfill avoidable expenses, such as big ticket purchases and costly vacations. However, you must always be certain of spending within your means, so that you do not end up living in a financial crunch or in debt.

Many card issuers or lenders might bring you lucrative pre-approved loan offers. However, understand that a pre-approved loan is ultimately a borrowed fund that needs to be paid back, and may involve hefty interest charges. Thus, borrow only when necessary and do not opt for such an offer in lieu of fulfilling unnecessary luxuries. Borrowing a loan without giving thought to your repayment ability might leave you in huge debt. 

Understand that money management is all about striking the right balance between savings and expenses. While a lot of advice can be pointed out, eventually what is required is a sense of financial wisdom, to earn and spend funds in the best ways possible. In due course, you must find out a solution that goes well with your financial goals and daily expenses. 

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