How Millennials Can Apportion Their Salary Smartly to Achieve Their Financial Goals

Recently, I was with my friends; we were hanging out at a cafe and asked for the menu. While my friend Mihir was browsing through the menu card, he said, "Look at this, guys, even this cafe has hiked their meal prices now. I'm just not sure how I'm going to save enough money."

To which my other friend Smriti replied, "I know, this inflation has caused an increase in prices of goods and services from groceries to clothes, almost everything. It was so much better for our previous generation things were not so expensive they could save easily; no wonder they keep taunting us now to save from our salary."

I responded by saying, "You see, there are various macroeconomic factors that lead to high inflation, which causes a rise in prices. Slower economic growth and unequal access to basic necessities are some of the factors that distinguish the challenges we confront from those faced by our previous generation. Furthermore, the lifestyle we seek to preserve, which includes cutting-edge technology, socialising, and so on, is expensive and distinct from that of our elders. As a result, we cannot compare how they save from their revenue sources."

"Given the current context, there is a huge risk to economic growth; therefore, the instability may persist," Mihir remarked. "Wait, does this mean that prices will continue to rise, and I will never be able to save enough money, build an emergency fund and invest in mutual funds ?"

To which I replied, "No Mihir, that is not the case despite the uncertainty in the economy or the rise in prices, you can save a reasonable amount of money if you apportion your salary wisely."

Being able to handle your money wisely entails more than just making ends meet. You don't need a lot of experience or to be a math genius to handle your money wisely. The challenge is to figure out how to save a portion of your paycheque while also paying off debts, covering basic living expenditures, and working towards your financial goals.

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So, if you're wondering how to manage your salary wisely, you have landed on the right page. This article elucidates various ways to help you save and create wealth with your hard-earned salary.

Here are a few elements for allocating your salary effectively; it should primarily be distributed among 4 areas, as follows:

1. Allocate to spend on living expenses

More than ever, effective budgeting and financial planning are important now in order to weather the consequences of inflation. You must establish your financial priorities and analyse avoidable expenses, which will lead to changes in your spending patterns that will allow you to build your savings. Tracking and categorising your spending will help you figure out what you spend the most money on and where you might be able to save the most money. Some apps that link to your bank account can help you track your spending, or you can track it manually by analysing your bank statements and receipts.

You need to practice the budgeting exercise to diversify your income across various financial requirements. One popular guide to budgeting is the thumb rule 50:30:20. The rule is a budgeting technique that will divide your net income into 3 categories. It states that you should allocate 50% of your income toward needs (living expenses), 20% toward wants, and 30% toward savings or paying off debts. How you allocate spending within these categories is up to you. It recommends dividing your income in this way:

Thus, as explained, you need to allocate 50% of your income wisely towards your living expenses and the basic necessities. Include the cost of housing, utilities, childcare, phone and Internet service, food, student loans, insurance,  transportation, and other regular bills.

[Read: 5 Simple Steps to Create Your Personal Finance Budget for 2023]

2. Paying off high interest debts

For most people, a debt like student loans, home loans etc., is unavoidable. High interest consumer debt is generally more damaging to financial stability and wealth. There are numerous approaches to dealing with high interest debt, including the well-known snowball method and the avalanche method.

Make monthly debt payments that work well with your budget. If your financial situation changes or you obtain additional income, attempt to pay off your loans as soon as possible. When borrowing, keep in mind that if you can't afford to repay in a reasonable amount of time, you shouldn't make the purchase because it will simply add penalties and excessive interest. Consider reducing unnecessary expenses and utilising the surplus to pay down your major debts. Maintain a debt-to-income ratio of up to 40% or below. This can help you minimise your debt burden, sleep better, and save adequately for investment purposes.

3. Saving for emergencies (emergency fund)

Life is unpredictable, and considering the ongoing uncertainties, it will be prudent to be financially prepared for any unforeseen events. It is very important to allocate a portion of your salary towards building an emergency fund.

An emergency fund creates a financial cushion to sustain during turbulent times. During an economic downturn or the current dark cloud of recessionary risks, the likelihood of retrenchment or salary reduction is very high. Thus, it is crucial to keep aside a portion for your contingency fund that will cover regular expenses until you find another job or a steady source of income.

An emergency fund should, ideally, cover your household expenses for at least 12-24 months, including loan EMIs. Start by putting aside any surplus into a bank deposit or short-duration debt funds; you may invest on an SIP/lumpsum in liquid funds.

4. Making long-term investments

Making worthy investments is very important in order to grow your wealth, and mutual funds are one of the best investment choices. One of the primary advantages of mutual funds is the opportunity to invest small amounts on a monthly basis, which is lighter on the wallet for investors, especially millennials. SIP-ing into equity mutual funds is known for generating significant inflation-beating returns in the long term.

Over time, inflation diminishes the purchasing power of money or investments. To keep the value of your investments, you must receive returns that outperform inflation, which can be accomplished through investment in mutual funds. The compounding effect and long-term investments in mutual funds can lead to excellent returns in favourable market conditions.

Mutual fund investments can also be useful in financial planning for the future. Millennials can align SIPs in mutual fund schemes to each of the S.M.A.R.T financial goals. Investors may consider diversifying their portfolios across different asset classes (equities, debt, gold, commodities, and real estate). This is important because it can help mitigate the downside risk in one's overall portfolio.

Consider diversifying your portfolio with the correct asset mix to reduce risk. While doing asset allocation, it is important to understand that each asset class has its own set of performance cycles and level of risk-reward. Nobody can foresee which of these assets will perform well.

I would recommend PersonalFN's SMART Fund Explorer, which can help to smartly diversify your mutual fund investments. As seen in the pyramid above, your investments should have a tactical allocation and provides your portfolio with the required stability and the potential to generate better risk-adjusted returns. PersonalFN's SMART Fund Explorer will also help you to align your mutual fund investments to your envisioned financial goals. It will offer you with two mutual fund investment options (A & B) based on your risk profile and return expectation. Further, you can also get instant access to the list of the best suitable mutual fund schemes recommended by our research team.

To conclude...

Your income, or salary, is what most dictates your lifestyle, and it's more vital than ever to be aware of it in order to be prepared for the future. Being more conscious of how you spend your money can make a significant impact on how and when you reach your financial goals.

Allocating your salary wisely will assist you in saving and enhancing your financial future, re-evaluating your spending habits, and making a positive change. It is the time to develop a money routine that will ensure you meet your financial goals and maintain financial stability over the long term.

MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.

She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.