Dear friends, your 20s are a very exciting phase in your life, because it is the time when you start earning money, and the thrill of owning your first salary is unmatched. You no longer have to depend on your parents, you could spend the money the way you want. That's an amazing feeling, we feel like on top of the world, but trust me, the 20s are the time when we are most vulnerable to making a disastrous financial decision also. Now, I don't blame anyone for that, we all make mistakes and that's how we learn. Moreover, when it comes to money, nobody has taught us how to manage it after we start earning, and more importantly, nobody teaches us how to avoid some common financial traps. For example, in India, the moment we start earning, our family members or relatives would suggest taking an insurance policy. It is almost like a ritual. But the majority of people end up taking the wrong insurance plan because they don't have any knowledge about it. Then another common mistake is buying things on EMI, because the moment people start earning money, they want their iPhone, which is worth more than their salary, And this is the YOLO (You Only Live Once) generation. So they want everything now, obviously, they take it on credit. But the problem is that by the time young folks realize this, they're already trapped in the credit card cycle and keeping the EMI along with the high interest. And when it comes to investment, everyone wants to double their wealth in no time. And young people end up falling into various Ponzi schemes and end up investing in the wrong stocks due to high greed. As a result, these financial mistakes destroy their financial lives forever. So if you're in your 20s then in this article, I will discuss some of the simple steps that could help you plan your financial life and make the best use of your young age. All right, let's get started.
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Tips for Financial Planning in Your 20s
1. Invest in yourself
Step number one is, Invest in yourself, there is a famous quote from Warren Buffett "The best investment you can make, is an investment in yourself". Now you might have done your master's, but it is very important to keep upgrading your skill set. So make sure, you spend a part of your salary brushing up your skills. It could be getting a certification in your professional career to get better job prospects at a higher salary, or it could be as simple as learning soft skills like- communication skills, time management, money management, or investment in your health. If you look around and ask highly successful people, the reason behind their success; It's an investment in knowledge. They focused their young life on constantly upgrading their skills and building a better version of themselves; because that knowledge eventually compounds and pays you the best return of your life.
2. Build a habit of saving
Step number two is, to build a habit of saving. The common misconception among young people in their 20s is that "it is time to enjoy life, as your entire life to save money". So they spend money, crazily on fancy gadgets, weekend parties, designer clothes, exotic vacations, and so on. But the entire idea of spending today and saving tomorrow never works; the reason is that these young people never develop the habit of saving. The lifestyle is such that they always run out of cash. On top of that, today, it is very easy to buy things on EMRs and credit cards, and young folks in their 20s get trapped in this credit card cycle and end up living paycheck to paycheck. Now, I'm not saying that you should save all your money, you should enjoy life, go out and have fun, but make sure that you save some part of your money. Because if you develop the habit of saving as early as your 20s you will make the best use of the power of compounding. For example, let's say you are 22-year-old and you recently started earning; Now even if you save and invest Rs 10,000 per month in the Indian economy, then over the next 30 years that money will compound to become Rs 3.5 crore at a 12% CAGR rate. So, you will have a corpus of Rs 3.5 Crore at the age of 52., and if you delay your investment for 5 years and invest the same amount of Rs 10,000 per month; then by the age of 52 your wealth would only be Rs 1.9 Crore. So, just by delaying the investment decision by 5 years, your wealth would reduce by Rs 1.6 Crore. In other words, if you don't delay your investment decision by 5 years, your wealth could increase by Rs 1.6 Crore, that's the power of compounding. I know it is difficult to visualize this growth, but trust me if you develop the habit of saving at an early age, even if it is with Rs 500 you will thank yourself later. All you need to do is keep track of your expenses and ensure that you spend within the limit, and you don't even have to complicate your investment. You can just invest in a Nifty 50-based index fund, and it will take care of your retirement planning.
3. Take a term and health insurance
Step number three is, to take a term and health insurance. Let me help you understand the importance of term and health insurance with a simple example. Suppose that you want to go from one place to another, so if you're going from the car, then you will wear a seatbelt and if you're going by bike, then you will wear a helmet. The simple reason is to protect yourself in case of an accident. That's exactly the rule of having term & health insurance in your financial journey. Trust me, friends, I've seen people losing out on all their hard-earned money just because their family members ended up with a health problem or an accident and they did not have health insurance. Today, a few days of hospitalization can cost you lakhs; And if you don't have health insurance, then you will end up paying the money out of your own pocket. You might have to break your savings or even how to borrow money. I'm sure many of you would have experienced the importance of health insurance during COVID. Especially the healthcare cost in India is rising at a rapid rate, healthcare inflation in India is 14%, which is one of the highest rates in the world. It means your healthcare cost is getting expensive every year. So make sure that you have good health coverage for your entire family and it is equally important to take life insurance. You want to make sure that in case of an unfortunate event, your family is financially protected, isn't it? I have seen cases where the main bread earner in the family died and his wife & children struggled financially. So life insurance is a must, especially if you have dependents but make sure that you do not mix insurance with investment. Life insurance is one of the most important aspects of our financial planning. But unfortunately, it is one of the most mis-sold financial products, the majority of people end up mixing insurance and investment and take the wrong insurance plan, don't do that mistake. Simply take a term plan that provides good coverage of Rs 1-2 Cr at a very nominal annual premium. Another benefit of taking life insurance and medical insurance in your 20s is you will have to pay a very low annual premium because as you grow this premium increases. So take a term and health insurance in your 20s. Although it is not easy to shortlist a term and health plan as there are a lot of terms and conditions that a normal person struggled to understand.
4. Build an emergency fund
Step number four is, to build an emergency fund. Another very important part of your financial planning, make sure that you have an emergency fund of at least 6-9 months of your monthly expense. For example, suppose that your expenses are Rs 30,000 per month, then build an emergency fund of between Rs 1.8 to 2.7 lakh, and don't invest this money in the stock market or equity mutual funds. That's not, how you build an emergency fund, even your PPF money is not your emergency fund. There are 2 important parameters for building an emergency fund. It should not be volatile, and it should be easily accessible at the time of emergency. For example, when you keep your money in a savings account or FD you get a fixed return, there is no volatility. And you can anytime use the money from the savings account and can even break your FD in case of emergency. The only point you should consider is your returns should at least able to match the inflation. For example, the problem with saving accounts is the interest rate is as low as 3%, especially with the top-tier banks and the average inflation rate in India is around 5%. So if you keep your money in a savings account at a 3% rate, you are actually shrinking your money. So there are savings accounts that offer a decent 5%-6% interest rate, you can consider that or even an FD. Dear friends, we live in a very volatile world, and these days, layoffs are very common in private companies, especially within startups. So make sure you have a good emergency fund to take care of your family in case of an emergency.
5. Save taxes
Step number five is, to save taxes. If you have a taxable income of over Rs 5 lakh then you have to pay taxes. However, you can always save tax by investing your money in various instruments. For example, you can invest up to Rs 1.5 lakh under Section 80C to reduce your taxable income. It means if you have an income of Rs 6.5 lakh, then you can show an investment of Rs 1.5 lakh to reduce your taxable income to Rs 5 lakh so that you don't have to pay any tax, and there are multiple options to invest under Section 80C including your PPF, Tax saving FD, ELSS mutual fund, and so on. Among all these options, my personal favorite is the ELSS mutual fund which serves 2 purposes. It helps you save tax as well as invest your money in the Indian economy. Another benefit of the ELSS mutual fund is that there is a lock-in period of only 3 years whereas options like PPF have 15 years lock-in period. On top of this, you can reduce your taxable income by another Rs 50,000 by investing in NPS (National Pension Scheme) but gain it has a locking period of 60 years of age. Although it could be useful for your retirement planning. You can even reduce your income tax by submitting your medical and term insurance payment receipts and if you have an education loan, then your interest payment on the education loan EMI reduces your taxable income under Section 80E; And there is no limit on the maximum amount allowed to be deducted for education loan interest payment, so you can save a lot of money in Taxes. And remember,
"Every penny saved is every penny earned."
6. Don't fall into debt traps
Step number six is, don't fall into debt traps. Today, we live in a world of instant gratification, we want everything now. And this urge to buy everything is even amplified by social media platforms like Instagram. The moment you see your friend enjoying a vacation, it creates the urge to plan a vacation. The moment you see your colleague buying a new car, you also want to buy a new car. It happens nowadays, you take out your credit card and swipe it and before you even realize it, you've already made the purchase. As a result, today's generation is already living under the burden of debt, be it car loans, home loans, personal loans, credit card payments, and the list goes on. Once you fall into this debt trap, it is extremely difficult to come out of it, and you end up spending your entire life paying high interest. So if you want to live a financially comfortable life, then make sure that you don't fall into debt traps. If you need anything, then save money and then buy but avoid buying it on EMI and loans.
7. Build a retirement fund
Step number seven is, to build a retirement fund. There was a time when our father's generation would have a permanent job and they would work till 60 years of life and then retire peacefully, and if they are government employees, they would get a pension. But now the situation has completely changed, these days corporate jobs have high pressure and intense competition. It is really very stressful which is only going to increase over time. I am sure nobody wants to work till 60 years of life, especially with the kind of unhealthy lifestyle we have. It is very difficult to sustain a job till 60 years of age. On top of that, remember, there is no pension system in corporate jobs. So you have to plan your retirement corpus as early as possible in your 20s. The entire idea is to achieve financial freedom at an early age, as early as your 40s so that you don't have to work for money anymore. And if you start building a retirement corpus in your 20s, you let the power of compounding work for you. Like I said before, even a simple investment in the Nifty 50 index fund will take care of your retirement planning.
Conclusion
In this article, we discussed 7 simple steps that can help you live a financially comfortable life. Dear friends, 20s is the most crucial age where few fried financial decisions can help you achieve all your financial goals, whereas a few wrong financial decisions can destroy your financial life. If I just summarize these 7 steps, first, you should invest in yourself, second, you should build a habit of saving, third, take a term and health insurance, fourth, build an emergency fund, fifth, save your taxes, sixth, don't fall into debt traps, and seventh, build a retirement fund. I wish someone would have told me this when I was in my 20s but trust me folks if you implement these seven steps in your 20s you will reap the benefit for the rest of your life; And you will live a very comfortable financial life and will be able to achieve all your financial goals. If you find this article useful, and you know someone in their 20s, do share this article with them. It could be a life changer.
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