First job of our career is like the whiff of new books of an academic year in school. It brings with it a bouquet of excitement, nervousness, and anticipation. However, it would be prudent to keep the below 6 Tips in mind when you are getting ready to join your first job.
It is mandatory to have a PAN when you start earning. Although your company would make sure that they would apply for a PAN on the day of your joining, it would be good to keep it as one of the most important thing to apply for as soon as you join your first job. In case, your organization does not deduct TDS from your salary, it would be advisable to pay the required TDS to the Income Tax department as soon as your PAN is allotted to you.
2. Pay Slip vs Offer Letter
In our excitement of having received our offer of appointment, we often do not look at the salary structure which often accompanies it. It is a general mis-conception that we just divide the CTC (Cost to Company) by 12 months and assume that it would be the monthly take-home salary. For example, if the CTC mentioned in your offer letter says 3.6 lakhs per annum, your take home salary or net salary would never be 3,60000/12 = INR 30,000. Let us see how we should evaluate the net take home salary from the salary structure from the offer letter.
a.Take home Salary – PF Component – own contribution & Employer’s contribution
Your Take Home Salary or Net Salary is arrived at keeping the various deductions in mind. All major organizations deduct EPF (Employee Provident Fund) which is usually 12% of your basic salary. An almost equal amount is contributed by your employer which goes into your PF account which is held with EPFO (Employees’ Provident Fund Office). Your total CTC includes both your contribution, which is deducted from your salary every month as well as your employer’s contribution. Hence, to calculate your take home salary, you would need to deduct both these components.
Many companies pay a particular percentage of your basic salary under a head known as Special Allowances. Usually this head covers the medical allowances, conveyance allowances, communication allowances, etc. It is always a prudent practice to retain conveyance related bills like medical bills, Petrol bills, Taxi Bills, communication bills like Mobile bills, internet bills, etc. Ideally, these bills should be accumulated in the first quarter of the financial year itself so that they can be submitted to the accounts/HR team when the window for submission opens up in the organization. Usually, for convenience sake, Human Resources teams open these windows twice a year. It is advisable to make use of the first window itself to submit all the Tax related bills / vouchers. This would considerably reduce your Tax liability and enabling you to increase your Take Home Salary.
3.Tax Slab you fall under
It is important to know the Income Tax slab rates and be aware of which Tax slab you fall into.
|Income Slabs||Tax Rates|
|1||Where the total income does not exceed Rs. 2,50,000/-.||NIL|
|2||Where the total income exceeds Rs. 2,50,000/- but does not exceed Rs. 5,00,000/-.||10% of amount by which the total income exceeds Rs. 2,50,000/-.|
|3||Where the total income exceeds Rs. 5,00,000/- but does not exceed Rs. 10,00,000/-.||Rs. 25,000/- + 20% of the amount by which the total income exceeds Rs. 5,00,000/-.|
|4||Where the total income exceeds Rs. 10,00,000/-.||Rs. 125,000/- + 30% of the amount by which the total income exceeds Rs. 10,00,000/-.|
Based on which slab you would be falling under, you would be required to plan your Tax savings. Hence it is a very important component of your personal finance and you should be aware of it.
4.Start Saving early & keep a check on Expenses
As young professionals, we love to spend our hard earned money. One of the underlying behavior trait that compels us to spend money is instant gratification. Instant gratification can be in buying a pair of jeans, latest smart phone, gaming console, etc. However, it is important to develop the habit to save a part of your earnings from your first job itself.
To understand our expenses it would be good to separate our committed and non-committed expenses. Committed expenses can be your hostel rent, conveyance expenses, food, etc. Non-committed expenses would be eating out, going to a mall, going to a movie, etc. Ideally your non-committed expenses should not be more than 20% of your take home salary. This would enable you to keep reserve money to plan for savings. It should always be remembered that any EMI (Equated Monthly Installments) that we opt for should not be more than 40% of your Net take home Salary.
5.Create that Emergency Fund
Much as we would expect our life to be protected from any untoward incidents, but reality is very harsh. There can be many incidents which can hamper our ability to earn money. It can be either a loss of job due to any reason or an accident which can incapacitate you for some time. It is usually a good practice to set aside 3 – 6 months of monthly committed expenses as an emergency fund. This amount can be kept in either a savings account in a bank, or can be invested in money markets making it easy to withdraw in case of an emergency.
a. Life Insurance
With the financial independence of the first job also comes a great responsibility. Responsibility towards our dependents. They can be parents, spouse, etc. It is always advisable to buy Life Insurance that adequately covers the risk that an unforeseen situation can cover and protect our loved ones. It is always advisable to steer clear of Insurance Policies that also substitute for Investment. You should buy a term insurance that adequately covers the risk and it would not be costly as well.
b. Group Health Insurance
Most of the organizations provide Health Insurance to their employees under their total rewards policy. This is however, this company-provided health insurance is not sufficient to cover the risk to your health, as it does not cover many illnesses. It is always advisable to buy a top-up medical health insurance to ensure all critical illnesses are covered.
c. Personal Accident Insurance
In case of an accident that involves temporary or permanent disability, leading to a loss of job, you would be totally dependent on your parents / siblings till you recover completely. It is advisable to buy a Personal Accident Insurance that would ensure that a fixed sum of money (up to 10,000 depending on your income level) is payable to you at weekly installments. This would ensure that the entire risk to be covered. The best thing about Personal Accident Insurance is that it does not cost much, usually around Rs. 2,000 – 4000 per annum.
While we rejoice and celebrate our first job, it is very important to keep the above 6 Personal Finance tips in mind. It is always a good practice to learn good habits from the very early stages of our professional career, so that their impact can benefit our financial well being for the rest of our lives.