Just started working? Here’s how to become financially independent

“Equity beats inflation over the long term and this is the time in your life (the 20s) when you can maximise your savings into equities,” says Dhamodiwala.

But what about those who live in metros like Mumbai and Bengaluru and have to pay high rents to stay near their workplace or commute to save on rentals? Dhamodiwala agrees that life in big cities can be tough and expensive.

But he reminds us that since Covid-19 struck two years ago, many employees worked from home. Many have shifted to their hometowns and moved in with their parents.

“The amount of savings you can make if you live in a tier-2 or tier-3 town and have a job in a large city like Mumbai is tremendous. These savings must go into equities,” says Dhamodiwala.

Kshitija Shete, cofounder of Gaining Ground Investment Services, advises youngsters to “invest in financial assets and not bricks.” She means that investments at a young age must go towards equities and debt instead of real estate.

“Having funds in hand gives flexibility and confidence to move around, take different job opportunities, relocate to foreign countries and so on,” she says.

Shete reminds us that investing in real estate at a young age binds you to a property and makes it difficult for you to move into a bigger property as your family expands or if you have to shift locations.

Spend - do not overspend You experience financial freedom in your 20s and 30s when you start earning your first few pay cheques. But keep a grasp on your spending, financial planners say.

Viral Bhatt, founder of Money Mantra, a personal finance solution firm, says that he has observed that youngsters spend a lot on luxury items. Many of these spends are impulsive, which is bad if you do it often.

“Spend only if you really need luxury items. It’s okay to spend, but it is dangerous to overspend,” he says.

Excessive spending also leads to borrowing. With online fintech firms and neo-banks mushrooming all around us, small-ticket loans are available for holidays, paying rent and so on. But these are expensive loans, which, when bunched up over time, can burn a big hole in your pocket. And they damage your credit score.

“Some of the ways to keep your debt under check can be avoiding use of buy-now-pay-later kind of options, and personal loans to fund discretionary spending,” says Prableen Bajpai, founder of FinFix.

But is all borrowing bad? Suresh Sadagopan, founder of Ladder7 Financial Advisories, says that there are exceptions.

“Borrowing for education is fine as it enhances one’s prospects in one’s career. Loans for a residential home at a serviceable level is fine somewhat later in life when one has decided where to settle,” says Sadagopan.

His warning: “Do not use credit cards for conspicuous consumption like buying a mobile, vacation and so on. Never get into a situation of going into revolving credit payments vis a vis credit card dues. If you refrain from frivolous borrowing, you will be so much ahead in achieving your financial freedom.”

Emergency fund One way to be financially free is to let your investments grow and not keep touching them regularly. One of the surest ways to let your investments grow is to have an emergency corpus. This is a small pot of money that you keep aside for emergencies or contingencies.

Bhatt says you need to have a corpus of at least 3-6 times your monthly salary or monthly expenses. Bajpai suggests that along with your regular systematic investment plan (SIP) that goes into equity funds for long-term goals, invest in debt funds to build an emergency corpus. And one separate corpus for “big purchases and fun activities,” says Bajpai.

An emergency or contingency corpus helps if you, say, lose a job or even take a sabbatical. That’s when your monthly salary stops but your expenses continue. Rentals, EMIs, insurance premiums, children’s school fees, grocery and utility bills must be paid. Your contingency fund should be big enough to meet such non-negotiable expenses when your salary stops.

Buy insurance today Health insurance is just as important. This insurance pays your bills in case of sickness and hospital admission.

You could meet your hospitalisation expenses with your savings. But once you dip into your savings, the amount goes down by that extent and it can take years to replenish it. On the other hand, if your health insurance foots the bill, it gets replenished immediately, ready to take on your hospital bills in the next year itself, if the need arises. That is why you need health insurance.

Also read | How to optimise personal health insurance when you already have an office-provided cover

“Personal medical insurance is a must-have even if your employer provides you insurance. Include your parents wherever possible in your insurance cover. This is important as the employer cover will be there only during the tenure of your employment. If you go on a sabbatical or leave your job to start a startup, a personal cover will be invaluable. Also, every employer cover may not be equally good,” says Sadagopan.

Make a financial plan

One you take care of the basics, it’s time to make a financial plan.

Dhamodiwala says that it’s best to keep things simple. Make a list of your long-term financial goals, decide how much money you need to achieve them, and then work backwards to decide how much you need to set aside every month. He says it is important to think long-term here and not get swayed by short cuts.

“Avoid cryptocurrencies. A few of my young clients have invested in cryptocurrencies and now they are sitting on huge losses because of the troubles in the crypto world in present times,” he says.

Also read | Millennials and cryptocurrencies: A story of missed profits, hard lessons and missed profits

Sadagopan says that it’s important to set side at least 10 percent of your take-home salary towards your long-term financial goals, to begin with.

“This can be slowly hiked to 30 percent and even more,” he adds.

A good mutual fund distributor or a Securities and Exchange Board of India -registered investment advisor is a useful guiding hand to help plan your finances. If you cannot find one, there are online platforms that give you packaged portfolios tailored for various types of financial goals.

But over time, make sure you find an advisor to guide you in person through the market ups and downs.