20s are that decade of your life where you start figuring out your life and plant the first seed of building wealth. In a lot of ways, it is the decade where all new things in your life start happening: the first job, the first salary and embarking on a professional life. Undoubtedly, this is an exciting decade when your carefree lives get the first taste of hard earned money. The flip side of being in 20s is the fact that you believe that the current earning will be enough for the rest of your life. There is a tendency to get so comfortable in the security of first job and rising income that Financial Planning does not come to your mind. The distant future is often overlooked and the responsibility one has to shoulder with passing time never crosses your mind.
While the 20s are full of firsts, it should also include another ‘first’, your first investment. When the salary credit text hits in your phone, you are delighted and mentally make a list of expenses that immediately need to be addressed. Starting from rent, grocery bills, branded clothes, dining out and so on. Once the expenses are done you start to look for things that you still had to buy and a substantial amount was needed for that. This often leads to a situation where you have little or no money saved for savings or investments. Living from one pay cheque to another is a fatal way of living. Your existence depends on the pay cheque and this can become dangerous for you and the ones who depend on you. What could you possibly do to lead a better life financially? Let’s find out.
Stay Out of Debt
It is so easy to get in to debt. The option of credit is so easily available and we are made to believe that debt can be slowly paid off; we are lured in to the trap. If you are unable to save or invest, the last thing you should do is get yourself in debt. It further pushes you on the edge of the cliff. When you are accessing credit, there is only one question you need to ask, “who is paying for this”? The answer to this is “You are paying” or rather your future self is paying. Debt is the process of borrowing from your future income.
Credit cards often come with points and offers and some of them are really useful. Use it wisely and make the best of the offers and schemes that are available, while borrowing within your means. It is best to avoid multiple credit cards because the debt piles up and the interest rates and delayed payment penalty keeps soaring. You will find yourself writing innumerable amount of minimum amount payment cheques. Debt is a vicious cycle, you take one debt to clear another and you will be doing it even in the next decades to come if you do not draw a line. So draw a line now and practice leading a debt free life!
Find How Much You Earn: Pre and Post Taxation
This might sound funny to find how much you earn. You must think, of course you know! However, are you aware of the taxation on your income? Do you know the amount deducted from your salary as Professional tax and EPF? As a professional many of us may not be earning on a monthly basis. One may be earning on an hourly basis or freelance basis. This means your incoming cash flow is irregular and uncertain. In that case it becomes imperative to keep a track of the various incomes and spending. Irrespective of the nature of the employment, knowing your income on a monthly basis to the last paise is your best option.
Establish a credit History
Much like the western countries, Indian Government has introduced the concept of credit score. The credit score of an individual determines how credit worthy he is. All you debts, loans and credit card history is under a centralized system which can see how prompt you are when it comes to interest payment and principal payments of your various loans. Depending on this a credit score is granted and a higher score reflects whether you will get further loans or credit. Hence, the need to keep yourself out of debt just got more important. If you cannot pay back small amounts in your 20s, EMIs and car loans in the future may be even harder for repayments. It is imperative to have a clean credit history so banks and other institutions can easily sanction loans when you need them in future.
As much as you may have dreaded this word ‘Investments’, it is the only way to build a solid foundation for your financial life. You need to start investments for two reasons:
- To build wealth for your future
- To be able to save taxes by investing in tax saving schemes
Start with Equity investments as they generate the highest returns. Your age also allows you to take high risks because of the long horizon of investments. It does not matter the amount you want to invest. You can start investing in Mutual Funds with just
र 500 per month and build wealth over time. So do not underestimate the small savings you have stashed away in your bank account. Put the savings at a place where you can earn better returns.
Under Section 80c of the Income Tax 1961, there are a variety of tax saving instruments which allows you to save taxes up to
र 1.5 lacs per annum. Start with investments in any of those schemes. They include Public Provident Fund (PPF), National Pension Scheme (NPS), Equity Linked Savings Schemes (ELSS) of Mutual Funds and many more. ELSS is an excellent option for the youngsters as:
- The minimum amount to start investment is
र 500. An amount of र 1000 invested per month through SIPs can get you र 23 Lacs or more – Please check this
- It allows you to build your wealth through Equity investments over long period of time
- Save taxes
- ELSS has given superior returns than NSC, PPF and Bank Fixed Deposits. You may like to check this link Top Performing Mutual Funds - Equity Funds ELSS Tax Savers
You may start small but the discipline counts more than the amount. Start small but start now! Check how you can create wealth by investing a small amount month after month for a long duration https://www.advisorkhoj.com/tools-and-calculators/systematic-investment-plan-calculator
Automate Your Investments
The sole reason why technology is being build is to make our lives much easier. Using the latest technology you can automate your monthly ECS payments and insurance premium payments. You just have to write the first cheque and the rest of the payments will be automatically debited from your account. Without automation, payments become another item on your check list just adding to your burden. By automating it you ensure the investments are carried on to your 30s, 40s or 50s without any trouble. This is the foundation of making your financial life worry free. This ensures that your regular premiums and other investment instalments are debited till the period of maturity. All of you have to do is maintain sufficient balance and to avoid payment declines, pick dates right after your salary date so before you can spend you are invested!
Start Saving for Retirement
Individuals are anchored in “Present Bias” where the present needs take an upper hand over the future wants. The distant future looks like a faraway line on the horizon and as investors we tend to overlook that. Retirement is one of those faraway things that we only dream of now and not consider it with the seriousness that it actually deserves. It is best to start saving and form habits even if with small amounts than try investing when other financial burdens take prime importance like EMI or child higher education. In your 20s you are in a relatively burden free stage. Hence, lay foundation to your retirement investments as what you start now will have to continue in the decades to come. It also works on the simple logic, the longer you save the larger will be your corpus. Also, the early you start saving for this the lesser will be the amount to be saved. These two factors alone should be reason enough to start now.
You may like to try this Retirement Calculator - https://www.advisorkhoj.com/tools-and-calculators/retirement-planning-calculator
You reap what you sow. The decisions that you take in your 20s will determine the course the rest of the decades will take. This decade is the building block, if you can lay a strong foundation now, the rest of the decades is just building upon the foundation. You do not stop being a fun individual because you have decided to do financial planning. Take a week off or a few days during holidays and do some financial planning. It is a onetime process with occasional review of your investments. Once you kick start the process of financial planning it is only a matter of doing your bit to keep the investments going. If you start it now, it is guaranteed that your future self will be thanking you.