One pay, countless demands For the young, monthly pay is like a superstar in demand. First, there are demands of current expenses like groceries, mobile services, and office commute. There are also imminent expenses, such as replacement of your old refrigerator. Then, there are dreams with big price tags like continuing education degree, marriage, buying car and home. The good news is that with financial planning you can party hard every Saturday and still grow rich to fufill big dreams. Here is how.

Follow the 50-20-30 rule Experts recommend that people in early work life adopt this rule. It involves earmarking 50% of pay for investments to be made first for major goals like home buying that require substantial money. Next, 20% be earmarked for loan repayments and then remaining 30% be used to meet expenses.

If your Saturday night parties often cost a small fortune or you stay in a costly city, you might find the thumb rule for expenses stick out like a sore thumb. Instead, you can target a smaller percentage, say, 20% and subsequently, with pay hikes, enhance the percentage.

Invest first, pay yourself later The alternative to the 50-20-30 approach is to invest a pre-decided amount first and then meet current expenses. You can do this by investing in a mutual fund with the SIP facility. SIP full form is Systematic Investment Plan (SIP). If you ask: “What is SIP investment?” the answer is that it automates regular investments by investing a pre-decided amount regularly in a mutual fund scheme.

Create a home budget The home budget is not a harsh diet for expenses but a tool for balanced use of pay or income for current and future needs. It requires you to identify essential and discretionary current expenses like weekend get togethers as well as major future goals like higher education degree that require regular investments. A budget provides actionable information that helps bridge the gap between dreams and reality.

Making budget convenient and effective For low stress budgeting keep broad heads like transport and entertainment that cover all expenses. On noticing a sudden spike or fall, you could take corrective action, like reducing or staggering the expense.

It is also important to recognise periodicity of expenses i.e., weekly, monthly, quarterly, and annual to streamline your cashflows for uninterrupted regular investments. For instance, you can plan a big ticket purchase like a smartphone upgrade. If old fashioned home budget with pen and paper is not your thing, consider online budgeting tools and mobile apps.

Protection first Unplanned and emergency expenses typically cause expense spikes. Their impact can be cushioned with an emergency fund built into the budget. Such a fund is typically 3 months of expenses for people starting out their financial lives. A budget also need to provide for insurance premiums for protection for life, health, income and major assets like car and home.

Emergency fund along with insurance cover go a long way in preventing premature use of long term investments during emergencies. This is the reason experts recommend that the young first have adequate insurance cover and an emergency fund before any investment.

Keep loan obligations under leash Banks and financial institutions typically market high interest rate personal loans and credit cards to the young. If such loans fund consumption expenses like Saturday night parties, the loan repayment burden significantly impacts investments. Ensure that overall EMI payments never exceed 45% of take home pay, with home loans EMIs accounting for up to 35% and expensive consumption loans like car and personal loans restricted to 10-15%.

Earmark growth investments for major goals To make the most of expense management to create a pipeline of regular savings for investments, identify your financial goals. This will help determine saving targets for each goal and regular investments required. Regular investments with mutual fund SIPs can be earmarked for different goals.

For financial goals more than 4 years away, consider higher risk investments like equity mutual funds and equity-oriented funds like balanced advantage funds with the potential for high returns in the long term. For shorter term needs like an international vacation, consider lower risk, lower return investments like those in liquid and short term debt mutual funds.

Begin with tax-saving investments In early work life, with limited capacity for regular savings and when you wonder how to save tax, you can consider tax saving mutual funds like ELSS mutual funds. For those wondering about ELSS full form, it is Equity Linked Savings Scheme. They provide annual tax savings of up to Rs 1.5 lakh under Section 80C. Like other equity mutual funds, they typically experience fluctuations in the short term but have the potential for high long term growth i.e., 8-10 years or more. ELSS benefits from equity mutual fund taxation where capital gains get taxed at a lower rates for those in the highest income tax slab.

Diversify into other growth investments Use only a part of hikes and arrear payments of your pay for a celebratory get-together and invest most in newer categories of investments seeking higher growth. You can first consider large cap index funds and large cap mutual funds. Subsequently, higher risk equity mutual funds such as mid cap mutual funds and small cap mutual funds can be added to the portfolio.

Periodically increase investments Mutual funds allow you to do that with Top Up SIPs where the regular investment is increased by specified a percentage at fixed intervals i.e., say, 10% annually. Further, invest periodic lump sums like commissions and bonus with Systematic Transfer Plan (STP) from mutual funds. In an STP, the lump sum is first parked in a low risk mutual funds like a liquid fund or short term investment plans like ultra short term debt fund. Next, regular investments are made in equity mutual funds and equity-oriented funds.

To conclude, “you can’t have your cake and eat it too” but you can surely party hard every Saturday night and still get rich.