ATM :: 5 financial skills for the young professional

By Devashish Chakravarty | 17 Mar, 2014, 08.00AM IST | Economic Times


As a young professional, how can you start from scratch and yet create a lot of wealth? Focus on your assets, decide how much corpus you want to build and map the path using the right financial knowledge. Your biggest asset and primary source of financial dividends will be the next 40 years of your career.

How you manage this investment will determine the wealth you generate. Like a good investor, learn the key skills, make smart career decisions and take timely actions that will help you grow exponentially.

1 Calculate the trade-off

While deciding on a career after graduation or picking the next job, you may make the mistake of choosing a wrong role that offers a higher salary. The counter-intuitive and correct approach is to ignore the salary during the decision-making process and focus on comparing the role or opportunities for growth. The reasons are two-fold. Compare the starting salary of a professional to the salary drawn 20-30 years later.

The first pay cheque is a tiny fraction of the later earnings and, thus, unimportant. However, future salary depends on the career path, knowledge gained and responsibilities handled. Hence, role selection is critical. In the initial phase, choose careers and jobs that maximise learning. Figure out if you will have the opportunity to take on greater responsibilities.

Once you are satisfied that it offers a reasonably large canvas to learn, you can negotiate and accept the compensation. If you are underpaid and have worked your way into a critical role, your employers will need to upgrade your compensation or risk losing you to a firm that values you fairly. If you have chosen a job with a higher salary but without commensurate responsibility, you will be the first in the firing line if the firm decides to trim the flab. So seek bigger roles with or without adequate compensation. The money will always follow.

2 Negotiate salary

While discussing the compensation, focus on how you will add value to the team, the product and the firm. Good negotiators do not speak about their previous salary, years of experience or the need for a bigger pay cheque.

Research the firm, its competitors, market conditions and standard compensation structure. Once the CTC is finalised, work on the various components to maximise the cash in hand. This means eliminating components that you may never see while reducing your tax burden. Similarly, ask for a higher basic salary instead of a sign-on bonus, which will not be available the following year.

There may be components in your CTC that require you to produce bills, say, travelling expenses. Though it is tempting to club all payments into the basic salary, you may miss out on tax-exempt components, increasing the taxable income and reducing cash in hand. Finally, ensure that what you agree upon is clearly reflected in writing in your offer letter.

3 Do the math before job hopping

Are you attracted by a new role that offers more money? You may still lose out financially if you have not done the math. Apart from the in-hand portion of your CTC, other components that impact your decision include gratuity, provident fund and insurance.

If you have completed four years in your present firm, you are a year away from earning interest after three years.

Finally, if your existing firm has a group health/life insurance policy for you and your dependants, check for a similar scheme with the new firm, otherwise you will need to spend from your pocket for your insurance needs. Finally, if the designation is that of a consultant, you are on a contract that may not be renewed. This makes your future income uncertain. Thus, calculate the total impact of changing jobs before you decide.

4 Compound a fortune

‘Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it,’ said Albert Einstein. Ignore the power of leveraging through compounding at your own peril. Start saving early to maximise the benefits of compound interest over your lifetime.

No amount is too small a saving; even if you earn Rs 10,000, set aside 10% of it. A monthly saving of Rs 1,000 in a recurring deposit of 8% compounded annually earns you more than Rs 21 lakh over a 35-year career. Assuming a 15% growth in your annual income, a steady 10% saving at 8% annual compounding gets you a tidy sum of over Rs 2 crore in the same period.

5 Save for no-job periods

Are you planning to take a break in your career either for professional or personal reasons? Estimate the time-line and cash-flow requirements for that period. Salt away a part of your income to meet your goal. Besides, when you return from your planned break, you may not find a job immediately.

Similarly, there may be other unplanned breaks in your career arising from personal events or on account of a bad job market. Maintain a cash reserve equivalent to 3-6 months’ salary or as easily redeemable fixed deposits, so that you are covered for the no job periods in your life.

Like a good investor, learn the key skills, make smart career decisions and take timely actions. Here’s how to secure your finances for a lifetime.

(The writer is Director, Executive Search, at Quetzal)

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