FINANCIAL PLANNING IN YOUR 20S: THINGS YOU MUST KEEP IN MIND

When it comes to money, the earlier you start planning, the stronger your foundation for the future will be. (File image)

Financial planning is an indispensable aspect of personal finance. If you are in your 20s and starting your career, financial planning is something you cannot ignore. Managing money efficiently to become financially secure while navigating unexpected circumstances takes constant planning.

When it comes to money, the earlier you start planning, the stronger your foundation for the future will be. Moreover, when you are young, you have the advantage of time, which is crucial when it comes to money and investments. In this article, we shall explore some financial habits, which, when adopted young, can benefit you later in life.

Start with the basics

The first step of your financial journey begins with budgeting. This involves segregating your income for spending and saving. Preparing a budget will not only allow you to distinguish your wants from needs, but also save. Budgeting is an effective tool that can lower money-related stress, as it helps you understand exactly where your money is going.

Save, save, and save

Saving is the next step of financial planning, and one of the most important. After you’ve covered all your regular expenses, you can save the remaining funds and invest them either manually, or by setting instructions for auto debit. When it comes to saving, try to put aside at least 20 per cent from your current income and increase this percentage as your income increases.

In order to save more, explore substitutes that can help you save money. For instance, cook at home during the week to save money and restrict take out for the weekends. You could also buy a personal vehicle or rely on public transport for your office commute instead of taking a cab every day, which can help you save.

Define your financial goals

In life, one may have various goals or dreams they would want fulfilled. Things like owning a house, a car, going on vacations, giving your children the best education, and retiring rich are examples of goals which require money, and are called financial goals. These goals can be categorised based on the time it may take you to fulfil them.

For instance, taking a vacation is a short term goal that can be fulfilled within 2 years. Buying a car may be a mid-term gals that can take up to 5 years to be realised. However, major expenses such as buying a house, planning for your children’s education or your own retirement are long-term goals that can take up to 10 years to accomplish. Creating a financial plan tailored to each goal can help you realise them.

Grow your money

The next step after you have defined your financial goals is to start planning investments to fulfil said goals. While savings will help you build a strong financial foundation, your investments will grow your money and help you achieve financial goals.

For instance, you want to have Rs.10 crore in savings by the time you turn 50 years. To achieve this goal, you will have to start working on it now. With a savings bank account that offers up to 3% post-tax returns, you will have to save Rs.1.7 lakh every month for 30 years to reach the desired goal amount. But, doing this may not be easy. There are better ways, such as mutual funds, which can help you reach your goal in a shorter time. If you invest Rs.30,000 per month in a mutual fund via SIP (systematic investment plan) that offers average returns of 12% over 30 years, you can reach your goal in the stipulated time. To boost your efforts, you can step up the investment as and when your income increases.

Be prepared for the unexpected

Unexpected events are a part of life and often happen without so much of a warning. A job loss or a medical emergency are two unexpected events which you can be prepared to handle with the help of an emergency fund. Evaluate your monthly expenses and create a fund that will cover up to 6 months of your living expenses. You can start creating your emergency fund with a recurring deposit or save it in easily accessible avenues such as liquid mutual funds.

Maintain Your Credit Score

Another thing that can really impact your financial planning journey is your credit score. Now, a credit score is a three-digit number calculated based on your credit history and reflects your creditworthiness. Lenders refer to this score to assess the borrower’s repayment potential. To build a healthy credit history, you must pay all your debts such as credit card bills and loan EMIs on time. A credit score above 750 is considered healthy and can strengthen your possibility of getting credit in the future.

So, remember to manage your debts smartly always to prevent them from impacting your credit score. Doing this can make it easier for you to accomplish bigger life goals such as home ownership, which often require a loan.

Protect Yourself

When in your 20s, understand the types of insurance available vis à vis your needs. Life, health and auto are basic insurance covers you may need to protect yourself and your family. Whether or not you need insurance coverage depends on if you have dependents or liabilities.

If you are the sole breadwinner of your family, get a term plan that will protect your dependents in the event of your untimely death. If you have no dependents or liabilities, you may delay buying insurance for the time being. However, buy a health insurance plan for yourself instead of depending on the one provided by your employer.

Financial planning is a necessity which when done in the present, can allow you to relax in the future. However, when laying out your plan, don’t forget to also enjoy life. Set aside a part of your income for things that add value to your life such as weekend getaways, eating out or even taking an upskilling course. Lastly, stay aware of financial developments so you can make better decisions when it comes to your money.

Adhil Shetty is CEO of BankBazaar.com

2023-05-20T02:15:05Z dg43tfdfdgfd