Note to readers: No two people’s financial plans can ever be the same. Our income, expenses, goals, aspirations and financial obligations differ. But the first principles are more or less common, depending on your age bracket. Moneycontrol personal finance’s new series called ‘Life stage financial planning’ will tell you what these broad principles are, depending on whether you are in your 20s, 30s, or 60s. Today’s story is about how those in their 20s should start their investment or money-making journey. A few right steps taken in your 20s will go a long way in securing your financial future for life.
The first salary is always special. In your 20s, the thrill of having a loaded purse and being able to spend your money any way you want is unmatched. Spend you must, but this is also the best time to start saving. Here’s how those in their 20s should start building their money box.
Control your spends
When we get our first jobs, our starting salaries are generally low. If you have to shift cities, life may not be easy. Rent in any big city is not cheap. Food and grocery expenses cannot be avoided. And if have an education loan, then you have to start repaying the debt as soon as you get your first job. Weekends are spent with friends, partying, dining and going out for movies and, at the end of the month, your finances become tight.
Experts strongly advise controlling expenses. Vishal Dhawan, a certified financial planner and founder CEO of Plan Ahead Wealth Advisors suggests making two buckets. One bucket consists of expenses you cannot avoid – your education loan repayments, monthly groceries and rent. The other bucket consists of your voluntary expenses – entertainment, movie streaming and subscriptions. “Live within your means. If you must, rent an affordable place, even if you have to travel a bit,” he says. One way in which Vishal says that expenses can be controlled is to transfer a fixed sum, say around 30 percent of your income, to another bank account. “Do not touch this other bank account. This amount should be out of bounds for your spending,” he says.
Can I afford to invest?
Most of us in our 20s feel it’s tough to set aside money for investments. “That is a myth. To those who tell us that they don’t have money to invest, all we ask them is to set aside Rs 1,000 every month,” says Priya Sunder, director, PeakAlpha Investment Services. With Rs 1,000 you can start a systematic investment plan (SIP; where you invest a fixed sum every month) with as little as Rs 1,000 in mutual funds. You can also invest in small saving schemes such as postal time deposits and the National Saving Certificate for as little as Rs 1,000.
“It’s not very easy to set aside money to invest every month at that age. But after a few years, when you see your money grow, you’ll be glad you started early”, says Kiran Telang, a SEBI-registered investment adviser.
If you start at 23 and set aside Rs 1,000 every month till you retire at 60, you end up with about Rs 83 lakh. But by delaying investments and starting 30, you will end up with only Rs 35 lakh.
Let’s go one step further. Your first salary might be low. But if you make good progress over the years, your salary would grow healthily. Financial planners insist you must top up or increase your SIP contributions, at least once a year. If you start at age 23 with a monthly SIP of just Rs 1,000 and then increase your instalment annually by Rs 100, you end up with Rs 1.38 crore at age 60, assuming your equity fund grows by 12 percent a year.
Health insurance
Most companies offer health insurance benefits to their employees. It’s possible that your first job might also offer you insurance. But that is not enough. Buy your own health insurance plan. “Medical costs rise more than other costs. Everybody needs a health insurance,” says Vishal. This year, with the spread of Coronavirus, many people lost their jobs. When that happens, your company-provided insurance cover goes away in an instant. That’s why you need your own health insurance, which is always there with you. And, in your 20s, health insurance premiums are the cheapest since you are typically healthy. Most insurance companies don’t even insist on a medical check-up at that age.
How many credit cards can I have?
When first-time employees open their salary accounts with banks, they are often persuaded to take credit cards. Easy credit by paying just the minimum balance month after month can easily lead you to a debt trap. Kiran suggests having just one credit in your 20s. “A credit card is not a tool to shop endlessly on things you cannot afford. It should just be used as a convenience in lieu of carrying cash,” she adds.
Make sure you pay your full monthly bills on your time. Do not roll over your credit card debt. It is the most expensive of all debts, with card companies charging as much as 40 percent annually on your outstanding.
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