20s is the first phase of life where you start working and become financially independent. First job brings income and a freedom to spend like you never had before. With a low level of responsibility at this age, it is easy to get into the habit of unplanned spending and live life paycheque to paycheque, or as is oten seen, beyond your incomes While it is less likely to affect you at this time, it might be financially detrimental in the long run.
Planning your finances might seem like a tedious task on the face of it, but it really isn’t that complex. It is about understanding the finances available and utilizing it in the best possible manner.
“How to go about it?” While there is no one set way of financial discipline, here are a few tips that can play a significant role in good financial planning during your 20s: –
Brush up your financial diction
Before you decide to skip this suggestion, just read what follows. The Reserve Bank of India has mandated banks and financial institutions to improve financial literacy amongst the masses. Thanks to that, you can now find many online knowledge centres with which you can educate yourself and improve your basic know-how of personal finance. What’s encouraging is that the information is presented in a vernacular way which makes it easy for everyone to understand.
Being aware of basic terms of personal finance will keep you in good stead with your financial planning.
Start saving and investing from the word go
One of the most elementary things that you cannot overlook is regular saving. Our parents tought us to start saving from an early age not because they don’t want us to spend, but because they recognize the benefit of saving early all too well. Developing the habit of saving and investing regularly plays a big role in building a corpus and achieving your financial goals later on in life.
The Power of Compounding
Imagine you are a 22-year old investing, Rs. X every year and earning an overall 10% annual return. By the time you are 60, you would have accumulated 300% more than your elder brother who did exactly the same, but started when he was 34 years of age.
For instance, a 22-year old’s investment portfolio contains life insurance, equity through SIP (Systematic Investment Plan), government bonds and EPF. Assuming he will stick to his investment plan and diversify it as and when needed, he can retire richer than say a 34-year old with a similar investment portfolio. It might sound a bit to ideal as it does not take into account market risks and the investment habits of the two individuals, but that’s where the power of compounding reaps dividends.
Build up a cash reserve
Another essential of good financial planning. The best way of doing it is to open a recurring deposit bank account where you can contribute a small amount every month. While it might be a bit testing at first, you will eventually see the sense in it once you do it for some time. We all have rainy days so it is best to be prepared for it.
Spend in a budgeted way
Much like your health regime, you need to follow some financial discipline as well. Let’s say that you have your eye on a particular smartphone but buying it now will stretch your budget unnecessarily. You are tempted to use your credit card, but are you aware you would have paid an additional 42% interest on that smart phone in just 12 months? Not so smart a decision after all, right?!!
The real smart thing to do would be to allocate your finances towards the monthly expenditures and set aside a fixed amount to save up for the smartphone. That way, you might buy the smartphone a few months later, but you will do it without financially burdening yourself.
Avoid credit cards
Like we saw in the example above, living life on credit is a path you should tread with a lot of caution. While it does look attractive at first, you run the risk of incurring debt that could be difficult to pay off. While there’s nothing wrong with using a credit card if you know how to manage them, it is always better to spend only what you have.
Get insured
This is definitely the first thing that you should do when you start working. Understand the type of insurance you want to for (pure, term or endowment) and buy a policy that provides sufficient life cover. While the benefit will be visible at a later age, it is another investment that teaches you to be financially strict.
And while you are it, do not forget to take Medical Insurance cover, if your family is not already covered by it. A small contribution annually will protect you from extremely high and unforeseen expenses in case anyone in the family is unfortunately in need to hospitalisation in the future.
Do not dabble in direct equity
A profitable investment for some and a poisoned chalice for others. If you have a thorough understanding of the way stock markets work and their historical performance, then fair play. But putting your hard money into direct equity without proper knowledge is a terrible idea.
You can still take advantage of investing in equity through SIP (Systematic Investment Plan) where you contribute a small sum every month. The benefit of SIP over direct equity is two fold : (a) You get highly experienced fund managers manage your portfolio, almost for free and (b) , SIP employs the power of averaging which keeps your money well shielded from the volatility of stock markets while providing considerable returns.
Take responsibility
It might be something as small as giving pocket money to your younger sibling or paying the electricity and phone bills. Not only does it give you an insight into how your household’s expenditure works, it prepares you for when you will be taking care of those expenses yourself.
Understand financial goals
Different phases of life have different financial goals. If 20s is the time to start managing your finances efficiently, your mid-years (30s & 40s) is for planning expenditure, buying property, caring for your family and your later years (50s & 60s) is about retirement planning.
However, not every individual is the same and one person’s goals might vary from that of another person. Having said that, starting early and being responsible with your finances in your 20s helps lay the foundation of a healthy financial life in the years to come.
