When Income less, the saving capacity is also less. For someone like Raj, the tax-saving instrument under Section 80C is probably the only way to accumulate investments. But trying to save 20% of his income is an ambitious goal for the young earner. It is typical for young investors with low income that expenses can quickly accumulate to consume the income.

Raj must first evaluate whether he is able to save 20% of his income every month on a regular basis, to find out whether he will be able to meet such a stringent annual savings target. If he finds that even after keeping an account of the lifestyle and other avoidable expenses, if the expenditure required for him is Rent, Electricity, Transport, Telecom and the like comes from more than 80% of their income, their 20% savings target is too high. He should be prepared to pay some taxes till his income and saving capacity increases.

If he finds that he is capable of saving but lacks discipline, saving before he spends is a better approach than hoping to save after spending. Raj should set up an electronic clearing service (EMS) mandate in his bank account and ensure that as soon as his salary is credited, the money is a 1-year recurring deposit in his bank, his PPF account and a tax in one SIP gets transferred to. Mutual fund savings. At the end of the year, he can use the RD to pay his insurance premium. The other two investments would have also accumulated. Then they will not have to stress about their year-end investments

(Content on this page is courtesy of Center for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Aarti Bhargava and Labh Mehta.)