If you have not crossed thirty, then you are in the early years of your career. You can buy insurance cheap, benefit from long term investing and go for home loans to buy a house of your choice.
When you start your career in your twenties, ‘save’, ‘invest’ and ‘plan’ would be the last words that come to mind as you bask in your newfound status as an earning individual. Parties, social groups, lifestyle products and brands would be top of mind. You would be spending a good part of your earnings, and the surplus, if any, would more often than not languish in a savings account.
This is no different from gobbling up your food rations on day one when a month-long trek across a desert looms ahead. Rationing your money, or in other words, financial planning, is a skill better imbibed earlier in life by choice than later in life by compulsion. Certain financial planning measures taken in your twenties will not only help grow your money faster, but will also chart a safe path across that desert.
Let’slook at the top 5 financial planning measures that you could take in your 20s.
Plan for a contingency fund: Emergencies can crop up any time. An essential part of financial planning is to have a contingency or emergency fund in place. This should ideally be equal to atleast six months of your expenses. Remember to consider all recurring expenses including all Equated Monthly Instalment (EMI) payments for loans when you compute this amount. Invest this amount in liquid mutual funds, which can not only be withdrawn at short notice, but will also yield you an income.
Close your education loan: Most people in India take an education loan for graduate or post-graduate studies. The repayment for this loan begins when you complete the course and start earning. So, when you start drawing salary, set aside the education loan EMI amount before indulging in other spending. When you are in your twenties, you have lesser commitments towards family. You may also get other liabilities like home loan or personal loan EMIs as you move ahead in life. Therefore, it is important to close the education loan at the earliest. Use year-end bonuses or any other windfall gains for this purpose.
Buy insurance: Having sufficient life cover and health cover is a critical aspect of financial planning. Estimate your liabilities and your dependents’ needs when you take a life cover in your name. It is always better to purchase pure term insurance, rather than combine insurance with investment. Your employer may be providing you with health insurance cover. Nevertheless, purchase a secondary health cover which can meet medical expenses of your family.
Insurance is a product which is best taken when in 20s, as the premium increases when you delay this. For example, if you wish to take a life cover of Rs. 50 lakhs for a 30-year term when you are 25 years old, the annual premium would be Rs. 4,181 with a leading life insurance provider. However, if you delay this decision and purchase the same amount of insurance cover when you are 30 years old, the annual premium would increase to Rs. 5,091. If purchased when you are 35 years, it would be Rs. 6,937. Similarly for a Rs. 5 lakh health insurance cover, respective figures would be Rs. 4039,Rs. 6195 and Rs. 7,902 when purchased at ages of 25, 30 and 40. So the earlier you buy insurance, the cheaper it will be.
Invest in equity with long term goals: Investing in equity instruments is the best for long-term goals. It is recommended to invest in equity mutual funds, in the form of monthly systematic investment plans (SIP). This will not only reduce your discretionary spending, but will also help in growing your money steadily. Moreover, when you begin to invest early in equities, you can get the benefit of compounding.
For example, assume there are two individuals Sunil and Anil who plan to invest in equity mutual fund SIPs till they retire. Sunil is 25 years old and has 35 years left for retirement, while Anil is 30 years old and has only 30 years left for retirement. Sunil invests Rs. 1500 per month, while Anil invests Rs. 2000 per month to catch up on the delay of 5 years in starting the investment. At 10% per annum return on investment, Sunil is left with a corpus of approximately Rs. 57 lakhs at the time of retirement, while Anil has a corpus of approximately only Rs. 46 lakhs, even though Anil invested more than Sunil on a monthly basis. This is because Sunil started in his twenties, and this helped in compounding his money at a faster clip.
Invest in property: Owning a house is very important for Indian families. Nowadays, many house owners are in their twenties. Banks are also competing to give home loans to house owners in their twenties, as most of their earning career is ahead of them. It is recommended to consider taking a joint home loan with your spouse or parent to increase the loan eligibility for buying a house of higher value. Delaying the purchase of your first house to your thirties or forties will not only mean you do not have a high value immovable asset, but will also mean you will have to incur rental expense in your twenties and also have a shorter time to repay the home loan when you do take it later in life.
Financial planning is an absolute must at every age. For those at the sunrise of their career, it is even more imperative. Taking the above financial steps in your twenties will provide a rock solid foundation for your finances as you take on life in your later years. Very soon, you will yourself negotiating that prickly desert with ease and confidence.