A Detailed Guide to Financial Planning for Salaried Employees

Your salary has been credited-there is no better feeling than seeing this notification pop up on your phone, right? But with excitement comes the responsibility of paying bills, managing expenses, saving and investing. That's where effective financial planning comes into play. It plays a key role in making your salary work for you, ensuring you cover your current needs and build a secure financial foundation.

In this guide, we'll explore financial planning tips to help salaried employees manage their finances wisely. Read on to find out more.

1. Setting goals

Whether it's saving for a dream vacation, paying off debt or building a retirement fund, having specific goals helps you manage expenses. This includes paying bills on time and allocating funds for savings and investments. For better management, you can create short, medium and long-term goals. This will allow you to track your progress and prioritise your immediate needs.

2. Calculating income

To determine your net worth, begin by taking a close look at your salary, debts and monthly expenses. For the final calculation, eliminate the total liabilities (loans and credit card balances) from your total assets (savings, investments and property). The evaluation of your net worth helps you understand your current financial standing. It assists you in making wise decisions about saving, spending and investing. This step is crucial in setting realistic financial goals and tracking your progress over time.

3. Planning a budget

This is a great start to create a financial plan. Use the 50/20/30 budgeting strategy to prepare. This includes assigning 50% of your income to your needs, 30% to satisfy your wants and 20% to your savings. It is advisable to look for more ways to increase the percentage of your savings. Yes, you need to stick to the budget, but that doesn't mean you shouldn't revise and reassess it regularly based on your changing financial situation. This is when you have a promotion, experience job loss, etc.

4. Managing savings

Your hard-earned income shouldn't go to waste. To make the most of it, salaried employees should prioritise saving a portion of their salary each month. Set aside a certain sum of your income. Open a separate savings account to keep this money out of reach from daily expenses. You can automate your savings by setting up a monthly transfer right after your salary is credited.

5. Making investments

Once you start saving, consider making investments to grow your wealth. For salaried employees, diversifying investments is key to building a robust financial portfolio. You can start with low-risk options like fixed deposits or recurring deposits for stable returns. Other than that, for long-term goals, investing in mutual funds or exchange-traded funds (ETFs) would be a wise choice. If you have a higher risk tolerance, you can put money in direct stock investments or equity mutual funds.

6. Planning taxes

For salaried employees in India, effective tax planning can maximise your take-home pay. Use deductions under Section 80C, like EPF (Employees Provident Fund), PPF (Public Provident Fund) and tax-saving fixed deposits, to reduce taxable income. You can also consider health insurance premiums (Section 80D) and education loan interest (Section 80E) for additional savings. Remember to submit your investment declarations early to avoid excess tax deductions. Smart tax planning helps you save more and manage your finances better.

7. Planning retirement

Don't forget about retirement planning. It is vital to make contributions to a retirement fund or pension plan early to significantly boost your savings for the future. For instance, contributing to the National Pension System (NPS) under Section 80CCD(1B) is beneficial for tax savings and retirement planning. Invest wisely, make a plan that beats inflation and helps you achieve financial independence.

8. Saving for emergencies

An effective financial plan should also include funds for emergencies, too. This sum will be useful for meeting those contingencies. You can reserve expenses for 3 to 6 months. Save this in a savings account so that you can access the funds whenever any needful situation arises.

Start with a separate savings account

If you want to build financial discipline, it is a good idea to have a separate savings account besides your salary account. If you prioritise easy maintenance, you can opt for a zero-balance account. It does not require a minimum monthly balance.

This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.