So, you’re 23 and you just got your pay-check. You could be saving money, but who cares? You could instead meet up with friends, buy those concert tickets, party hard, shop for your favourite designer brands, get a fancy haircut, and generally blow it all up. We think when we save at that age, we miss out. But it doesn’t necessarily have to be that way. You can enjoy your money, with some discretion.
You are now on the path of your adult life, with responsibilities like paying your bills, EMIs and making important life choices. Hence, it’s also important to do a bit of financial planning. “Financial planning for career beginners is vital because it allows him/her to adopt personal financial planning processes right from the start and become better financial decision-makers in life,” says Arijit Sen, a Sebi-registered investment advisor and co-founder of Merry Mind, a Kolkata-based financial advisory firm.
Here are the five financial tips you could follow in your 20s, to lead a stress-free life later.
1. Create a budget: No matter what, your expenses should be lower than your income so that you could create a surplus. The only way to keep your finances on track and save money is to create a budget. So, list down all your expenses. You could take the help of a budget app to get an idea of how much you are spending under each category. Accordingly, you could necessarily make adjustments. “For many young adults in their early 20s, balancing finances and a social life can be challenging. You may have a long wish-list like owning the latest gadgets, buying a car, owning a residential property, foreign tours, own marriage, etc. Budgeting is not something one may love to do. It starts with acknowledging your present financial situation and living within your means,” says Sen.
2. Build an emergency fund: There will be times when emergency expenses will pop up. It could be due to a medical need, or shifting into new rented accommodation. Emergency funds also come in handy if there is a sudden loss of employment or when you are moving to another city. Keep at least 3 months of your expenses in a savings account or liquid funds, from where you can access funds at a short notice.
3. Get your risks covered: The earlier you buy a health plan, the lesser you will pay as premiums. You need to get life insurance if you have dependents like your parents. In such cases, get an insurance cover of 6-10 times your annual income. Buy a term plan online as it’s the cheapest life insurance on offer. “Just as an architect gives attention to put up a strong plinth/foundation while constructing a building, risk management in the form of an emergency fund and insurance planning is a fundamental requirement in personal finance,” says Sen.
4. Save for long-term goals: In your 20s you might think that it’s not important to start saving from now. Nevertheless, start saving in some form. The idea is to start putting away at least 10 per cent of your income every month. One easy way to do this is to start investing in a public provident fund (PPF) account and start making deposits. To get exposure to equities, you could invest in Equity Linked Savings Scheme (ELSS) funds. While PPF has a lock-in period of 15 years, ELSS has a lock-in period of 3 years. Both these instruments are eligible for deduction under Section 80C of the income tax Act, up to Rs 1.5 lakh. Once the tax saving has been taken care of, you can invest your surplus funds in systematic investment plans (SIPs) of equity mutual funds. Over a long-term horizon, they have the potential to give high returns.
5. Invest in yourself: You could be over with your college education, but you need to keep investing in yourself to upgrade your skills. Whether it is a certification course, a music lesson, an MBA or something else. You need to constantly upgrade your skills. This would help you fit in better in the industry and be eligible for a better job.
If you follow these rules, you will be building a solid foundation for your future and reducing financial stress with very little effort now.