Early 20s are when you first enter the workforce. Your salary is usually entry level. You are getting a sense of financial independence for the first time in your life, so your aspirations are off the charts! The instinct for most of is to spend our first few years’ salaries on things and travel. To my mind, that’s great.
It is very likely that what you save in the first year of your job will be a fraction of what you will be able to save in your 30s. But early habits of saving, will hold you in good stead as you grow older and your income grows.
Most importantly, do not underestimate the power of compounding. Rs 1 lakh invested at 10 per cent when you are 20 years old grows to Rs 45 lakh when you are 60. If you invest the same amount at 30, it grows to only Rs 17 lakh.
Therefore, it is good to enjoy your money in your 20s. But your parents are right when they tell you to start saving.
Here are some basic rules to get started with.
Put Away 10-20% Of Your Salary
When you do the math of your expenses, assume that only 80-90 per cent of your salary is available to you. You were probably a student till recently and so you know what it’s like to live frugally.
The best way to make sure you save and invest enough is to frontload your investments like scheduling your systematic investment plan (SIP) for the first of the month, invest in your Public Provident Fund (PPF) in April instead of next March, and so on.
If You Don’t Invest, You Lose Money To Inflation
The most important thing is to not leave the money in your savings account. Apart from what you need immediately, start investing the rest of it. The idea that money sitting in savings account is “safe” is flawed.
Your money is losing value everyday against other assets–like in 2021, the rupee lost value against equities, commodities, and other assets because of inflation. Therefore, it is very important that you view saving and investing as part of the same process.
It’s Okay To Make Mistakes
You will make mistakes in your saving, investing and expenses. You might invest in something because everyone else is doing it, spend more than you planned to or you got lazy and didn’t start that SIP. It is okay.
It is important to learn from the mistakes and course correct. Remember, it’s never too late or too early to start saving and investing. As the Chinese proverb goes, “The best time to plant a tree is today.”
Use Goals To Save
You want to do a European vacation next year? Maybe buy the next iPhone? Make a separate pool for these big expenses. Using big goal posts to delay gratification is an awesome way to build saving habits.
One of the biggest failings of our education system is that they don’t teach personal finance in school. Therefore, read a couple of books on how finance, the stock market and asset allocation work. This investment in education will give you the right principles to get started on your saving and investing journey.
Basic “Hygiene” Investments
Max out your provident fund, start a Nifty SIP, buy a term life insurance and a health insurance policy.
Remember that saving is boring. It’s like taking care of your health; you need to work at it every day.
Therefore, as you start your careers and your personal finance journey, build good habits from the beginning and watch them compound.
The author is co-founder of Upside AI
(Disclaimer: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)