Keeping aside a portion of your salary when you start earning, possibly in your early or mid-twenties, is a sure-shot way to secure your financial future. It is all about spending less than your earnings and investing the difference. Investment habits, when inculcated early, can reward you with a stress-free financial life. In this article, we will discuss the potential of investing in your 20s.
Financial Situation in the 20s
You are fresh out of college with your first job (or paid internship). Tasting financial independence for the first time can be overwhelming. Salary will certainly be more than the pocket money or stipend you earned until then. Suddenly, there is a lot of money in hand. But then, there are also expenses for which you cannot rely on your parents anymore. Juggling financial freedom and responsibilities will not come naturally to most people.
Not to mention that the urge to spend on impulses and finer things will be more in the 20s. Money management is an acquired skill and the earlier you start the better you will get. This is why, starting to save in your 20s, no matter how small, will leave you with a wider investment horizon. Retirement might seem ridiculously distant at this point. This means you will have more time to accrue money towards your golden years (assuming you plan to retire at 60).
Investment avenues for young adults
Where you park your money is as important as investing. Given below are some of the schemes suiting people with diverse risk profiles and from different income backgrounds.
Post office savings schemes
The post office is a trusted place to park your money. Aside from ensuring absolute capital protection from a range of schemes like 5-year RD, POMIS, National Savings Scheme etc. among others, they give competitive interest too. You can even open a PPF account through the post office.
Public Provident Fund
A long-term retirement saving scheme devised by the central government, PPF currently offers 7.6% interest. It is better to invest at the beginning of an FY (starting from Rs. 500 to 1.5 lakhs) to reap maximum benefits. At maturity, it can be extended further in batches of five years. The interest, capital, and proceeds are tax-free (what we call Exempt-Exempt-Exempt or EEE benefit).
This belongs to the debt fund family. Liquid funds focus on ultra-short-term avenues like bonds, government securities or treasury bills, and simply earns you an income while assuring capital protection. In fact, the fund manager invests in debt securities that have a maximum maturity period of up to 3 months (91 days). As a highly liquid and low-risk investment, this can be an ideal emergency fund.
It is always good to have a short-term saving scheme as an emergency fund. For instance, keeping an RD of 6 months to 1 year can ensure that you always have disposable cash within reach. It is easy enough to start via internet banking. Most banks offer 6%-7% interest rates.
Systematic Investment Plans (SIPs)
Equity funds are favoured for their superior return-generating potential. But many think that to invest in equity funds, you need to have a huge amount to spare. By investing through SIPs, you can easily keep aside a small amount (as per your comfort and convenience). There are weekly, monthly, fortnightly, quarterly and even daily SIP schemes available.
This is another low-risk financial instrument that promises capital protection. When a financial institute or a company borrows from you (along with hundreds of other investors), and in return pay you interest, we call it a debt fund. You will get this regular flow of income regardless of the said entity’s performance. Ideal for people looking for steady earnings. However, the Net Asset Value of a debt fund fluctuates with changes in the overall interest rates in the economy.
Getting your life insurance covered in the 20s means that you can get a higher coverage at a relatively lower premium. As you become older, the cost of insurance will increase too. For instance, health insurance and mandatory vehicle insurance are not something you can skip. The cost of healthcare is such that one medical emergency can wipe out savings if you are not insured. Life insurance, however, availed at a younger age can reap heaps of benefits at a lesser price.
Money Mistakes to avoid in your 20s
There is no need to make mistakes and learn from them when you can learn the same things. Financial mistakes can be expensive and it will take time to recover from even the slightest lack of judgment. Let us not make young adulthood a platform to fall and get up. Here are 5 common mistakes to avoid in the 20s.
Not budgeting it out
Managing all your expenses on a fresher’s pay scale can be as daunting as it can be an eye-opener. Assuming that you don’t get pocket money anymore, of course. This is why the 50-30-20 rule makes sense. Say, your salary is Rs. 40,000. Keep 50% i.e. Rs. 20,000 for rent, groceries, utilities, commute, clothing etc. Put aside 30% i.e. Rs. 12,000 for your savings and investments – ideally, Rs. 4000 towards long-term schemes like debt funds or ELSS, Rs. 4000 towards short-term or mid-term plans like RD or liquid funds for sudden contingencies, and the remaining amount towards goal-oriented schemes like buying a car or house or going for an international trip.
If you have debts, spend the last 20% on repayments and EMIs and if you don’t then either increase your savings or splurge on yourself. How practical do you think this can be?
It is never a good idea to have a Scrooge-like attitude and save every rupee without treating yourself once in a while. However, an introspection on whether you need it now or just want it will help you to make wiser decisions. If you keep aside a small amount to indulge in fineries – an accessory or a designer dress, a bicycle or a camera – it won’t burden you or lead to regrets. Feeling deprived can lead to frustration and unhappiness, especially when your peers seem to be enjoying a great lifestyle. And that is not the point of investments.
Stacking up debts
The credit card generation, as we are infamously called, has more temptations to fight and pitfalls to avoid. Every day, you get at least one email, call or SMS asking if you want a personal loan or a new credit card. People have almost forgotten that by swiping credit cards, they are borrowing and the money has to be repaid. Most credit card companies give a zero interest window period. But once you pass that timeline, it becomes difficult to pay off the entire dues (and not just the minimum amount). Clearing your outstanding amount in a timely manner will also improve your credit score.
Not increasing your income
This is the age when you have plenty of physical and mental stamina to work hard along with drive and passion. Don’t let it go to waste. Aside from your 9-5 job, you can look for other income sources. It could be anything like becoming a freelance consultant (in your area of expertise), investing in dividend plans or schemes that earn you a monthly income or taking tuitions for kids. There are plenty of opportunities out there. You just have to look for it.
Being a YES person
Are you that person who always end up paying the bill for those weekly get-togethers? Are people always borrowing from you and forgetting to return on time, and you don’t like to remind them? Generosity is an admirable trait, and that is not something you need to change about yourself. However, draw the line when you feel like being taken advantage of. There is no need to allow people to leech off on you just because you are there. The absence of a fair system in your group only shows that you need to reevaluate your social circle. It is natural to feel financially lost in the early stages of your career. It will change as you learn to handle money.
If you are feeling apprehensive, you can also start small and slowly build on it. With Numbr, you can start investing the spare change from your everyday transactions.