Millennials are infamous for handling their finances poorly. They are assumed to have unhealthy spending habits and are considered to have minimal knowledge of how to invest their income. And these perceptions are prevalent for good reason; a survey revealed that millennials usually underestimate the need to make sufficient investments in their lives.
But here’s the other thing that the survey found. Most young people would be willing to make wiser financial and spending decisions, if they had the right knowledge. We all know the benefits of maintaining healthy financial habits; we are able to multiply our savings, save for retirement, make the most of tax benefits, and take care of emergencies. And despite these well-known benefits, many people in their 20’s fail to start their journey of being financially secure.
While investment, budgeting, and other finance-related terms might seem daunting, the truth is that getting your finances in order is not very difficult. So, if you have been thinking of getting your income ad savings in order, but are struggling to identify a starting point, here is a starter guide to personal finance and investment in your 20’s.
A starter guide to planning finances and investing in your 20’s
- Avoid excessive use of credit cards
Credit cards have become ubiquitous in today’s customer-driven world. It has also become an easy tool for young earners to have a higher purchasing power. However, despite the reward points that you earn with each swipe, credit cards aren’t the best way to shop. A form of pre-approved and instant personal loans, the cost of missing a single EMI payment can be burdensome. Add to that the fact that they come with high rates of interest and penalties means that they are best used in moderation. Remember to not cut them out of your spending habits completely, because paying your credit card bills on time has a really significant benefit; which is, building a healthy credit score.
- Work towards achieving a high credit score
The one number that is extremely important for your finances is your credit score, which is based on your credit history. A healthy credit history helps an individual in obtaining loan approvals, and even lower interest rates. Furthermore, their usage is not limited to banks and financial institutions alone as some employers also check the credit history as part of employment background checks. The best way to ensure that you have a healthy credit history is to use the credit card judiciously and ensure that the debt incurred is paid timely and is not delayed. Paying your credit bills and EMIs consistently on time will positively impact your credit history, and eventually boost your credit score.
- Pay utility bills on time
Another factor that impacts your credit score is your ability to pay the bills on time. A continuous practice where bills either remain unpaid for a longer duration or are paid once they are overdue has a negative bearing on the credit history and might also lead to incurring of penalty or interest on late payments. The practice of delaying payment of bills might impact the credit score adversely. Thus it is best to pay all your bills in a timely manner, and setting up the auto-deduct facility from your bank account or cards to ensure that you do not miss the deadline, even if you forget.
- Create a monthly budget
The budget forms a crucial part of overall financial planning. Simply put, a budget is an approximate calculation of expenses and income that you have over a period, usually a month. If you’ve never made a budget for yourself, the exercise of evaluating your monthly expenses will help you understand where your money is going and how to curb unnecessary expenditure. An ideal approach for creating a budget is to identify the expenses that are necessary and recurring, and also add 15-20% of that amount as miscellaneous or unforeseen expenses. Once this assessment is done, you will be able to understand how much of your income you are saving each month. Remember, a budget is only effective if you make efforts to stick to it.
- Purchase insurance
Insurance is often associated with people in their 30’s and 40’s; however, this is the biggest misconception. It is critical to remember that insurance provides safety if something unfavorable or unforeseen happens and is one of the best investments you can make, especially at a young age. Not only that, but it also becomes a source of savings for a future with and can also act collateral in certain credit conditions. Apart from having life insurance, it is recommended that an individual gets coverage for medical needs, house, and insurance of other valuables. Another major reason to have insurance, especially life insurance at a younger age, is that it comes with lower premiums and other associated benefits as there is a lower risk of any illness when one is young.
- Build an emergency fund
Getting insured can save you a lot of hassle during times of emergency, but you also need capital to help you ride through them. Setting up an emergency fund will help you take care of expenses that might incur suddenly and require large amounts of money. As a thumb rule, you should have an amount equivalent to three-to-six month’s salary at any time in your emergency fund. If you want to start building an emergency fund, start by setting aside a small amount each month in a different account and let it accumulate over time. After a certain period, you can also consider investing it in low-risk instruments that do not have lock-in periods.
- Start with small investments
Most young people wrongly assume that unless they have a high corpus of investable funds available, there is no point investing at all. However, there are a variety of investment tools available in the market that allow people to start with as low as Rs. 500 per month. Remember, the key to the good investment decision is not the amount of capital investment, but the consistency of investment. Starting early with your investment also gives you a head-start in growing your savings using the benefit of compound interest. If you haven’t heard of what compounding interest is, make sure you understand the concept and make the most of it.
- Invest with a goal
It is important that your investment decisions are objective-based. It might sound obvious, but you must zero in on the right investment instrument after determining whether it aligns with your personal goals. Starting in your 20’s naturally gives you a chance to undertake long-term investment, but you can invest for other purposes as well. These could be to save taxes, have short-term returns, or save money to buy a house or car. Thus, spend enough time to understand the features and benefits of an investment scheme before opting for it.
Why you must start financial planning and investing in 20’s?
When it comes to financial planning and investing money, the golden rule is “sooner the better.” Most individuals land up with their first job while in their mid 20’s, which is also the ideal age for a person to start making a plan on where to put their money. Here are just a few of the many benefits you can enjoy if you make wise investment decisions:
- Greater ability to invest: When people are in their early 20’s, they usually have zero or minimal personal responsibilities. This gives a huge scope to plan and invest their savings.
- Higher risk-taking capability: Young people have more freedom to invest in the high-risk medium of investing like equities, thus giving them a higher yield on the money invested.
- More savings and early retirement: When you start investing in your 20’s, you are far from the retirement age. This gives you a chance to have comparatively more time from an individual who starts investing in his 30’s. The formula of compound interest that comes into play ensures that you receive higher returns on your savings or investments when you start planning your investments from an early stage, which can also help you retire earlier than your peers.
To sum up, it can safely be said that starting to plan, invest, and save early on will give many benefits in life. One should ideally start planning and investing as soon as they start earning. The amount being invested could be a small sum, but what needs to be kept in mind is that the right investment decisions are usually based on consistency and discipline.
Dig deeper and find out more about the points discussed above; reach out to your friends who work in finance, consult investors, or talk to someone older in your family. No matter how you choose to learn about saving and investing your money, the fact is that if you put some effort and learn how to handle your finances and make the right investment decisions, you will be on your way to securing your future. Good luck!
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