I’m Out of College and at My First Job. How Do I Learn Financial Discipline?

by Vinaya HS on January 20, 2011

in Finance

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This is a question that I’m often asked. In fact, a couple of weeks back, a colleague whose internship was recently converted into a full-time position also posed the same question:

“Starting this month, I’ll be earning a regular salary. How do I ensure that I don’t spend it all away?”

Awesome! The road to financial discipline begins when you have the right mindset. And the fact that you’re asking this question shows that you have the right mindset.

I wish I’d asked this question when I started my career. Because, the problem with newly found financial freedom is financial indiscipline — the desire to spend it all away. And I did spend it all away. Four years into my career, I seriously wondered where all that money went and I didn’t have an answer. I wish I was financially disciplined.

In retrospect, I believe the trick to learning financial discipline when you’re beginning your career is to ensure that your money gets automatically saved each month even before it reaches your hand. When you can’t touch it, you can’t spend it.

Now, how do you do that? I’d recommend two options to begin with.

  • Contribute fully to the Employees’ Provident Fund (EPF) and optionally as much as you can to the Voluntary Provident Fund (VPF).

If your employer offers you an option to avail the EPF facility as part of your compensation, I’d strongly recommend that you take up this option. I’ve written quite a bit about the EPF in the past and I’d like to particularly highlight this point.

A quick example:

Suppose your Basic Salary is Rs 10,000 per month. When you opt for the EPF, you automatically save a minimum of Rs 2,400 each month (12% of your Basic Salary that’s directly deducted from your take home pay plus an equal match from your employer) in your EPF account. For the amount that you contribute, the deduction from your salary happens even before your salary reaches you. Simply put, you can’t spend this amount. Passive financial discipline. It’s what they call paying yourself first elsewhere.

And you could even bump-up your contribution by opting for the VPF. A strong case in point: D has been contributing an additional 8% to the VPF since she started her career almost four-and-a-half years ago. So she’s been automatically unable to spend 20% of her Basic Salary (or 8% of her Gross Salary) each month.

Automatic financial discipline. Trust me. This method simply works.

  • Start a Recurring Deposit (RD) for one year.

While passive financial discipline is good, it’s great to learn some active financial discipline as well. To do that, open a one-year RD with the bank where you have your salary account. Fix a monthly contribution that you think is doable (I’d recommend 20% of your monthly Gross Salary) and transfer this amount each month into the RD as soon as you receive your salary. Though I’d prefer that you do this manually each month (remember, you’re learning active financial discipline), if your bank allows you to automate these monthly transfers between your salary account and the RD account, set the transfer to happen a day after the expected monthly date of credit of your salary.

Do this for one year and you’ll have learned financial discipline.

12% of your Basic Salary (or 4.8% of your Gross Salary) into the EPF plus another 20% of your Gross Salary into the RD. That’s 25% of your Gross Salary saved each month. Enough to inculcate financial discipline?

What do you think?

Thanks for reading this article. I'd love to hear your opinion. Please use the comments section below to share your thoughts. I frequently write new articles that also cover several other aspects of personal finance including credit cards, financial goals, health insurance, income tax, life insurance, mutual funds, retirement planning, and much more. You can Subscribe through Email and receive new articles directly in your Inbox or you can Subscribe through the RSS Feed and receive new articles in your feed reader.

{ 6 comments… read them below or add one }

pattu January 20, 2011 at 1:34 PM

Young people should know to distinguish between needs and wants. They could then save as much as 50% of their take-home pay depending of course on their basic salary.

“Though I’d prefer that you do this manually each month (remember, you’re learning active financial discipline)”

Well said. This give one a feeling of accomplishment.

Anil January 22, 2011 at 12:37 AM

Instead of RD, i feel SIP in Equity diversified funds is better. That way, they can understand the nuances of mutual funds. I had started investing in mutual funds via ELSS route when I started my career.

Vinaya H S January 23, 2011 at 10:49 AM


Thanks. :-) You’re right. It does give one a feeling of accomplishment.


But there is also a downside to that approach. The longer lock-in plus the market risk. What if you actually (and out of sheer bad luck) see your corpus decrease in value? I personally feel that the road to financial discipline ought to start with pure-debt instruments.

Anoop Cherian February 26, 2011 at 12:40 PM

Thanks a Lot…:-)
This was really helpful…Giving the BIG picture of Financial Discipline.

Sujay November 26, 2012 at 8:11 PM

RD is good but again profits are taxable. So why earn 30% lesser?

Since I am an investor with a risk appetite, I personally prefer Mutual Fund (tax saver variety) when I feel the market is right or PPF when I am risk averse.

Vinaya HS November 28, 2012 at 7:44 PM

@Sujay –

That’s quite true for an already financially savvy saver/investor.

But here we’re talking about a first-time young saver looking to build financial discipline (say to fulfill a long-cherished purchase such as a bike, a camera, etc.). Long lock-in periods kind of mess that up. You don’t want to put money in an ELSS or in the PPF at this stage.

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