Nothing quite matches to the feeling of being in one’s 20s. This is the first time you taste financial freedom. The limitations of pocket money give way to newfound “riches”, which is your income you draw every month. But this is where you need to be careful. You don’t have to go on a spending spree to match your friends’ lifestyles.
Follow what Spiderman says: “With great powers come great responsibility.” Be prudent with your money; you don’t necessarily have to apply the squeeze on your income but you need to think long-term. Wouldn’t it be better and comforting if you had a large kitty when you touch the next decade of your life? So, why not indulge in some investment planning and see your money grow in front of your eyes. Here’s how you can go about it:
Make a financial plan
The cardinal mistake that youngsters tend to make in their 20s is thinking they can begin investing later as they are “too young”. However, if you are old enough to have an independent income, you are ready to start investing for your future. Like you use a map to reach a new destination, your journey to becoming rich needs a roadmap too. A financial plan, therefore, is the first step you should take on this journey
Managing your cash flow
The first step is to make a budget and stick to it. A budget will give you a clear idea about your expenses and surplus. The money you save every month can be kept in a separate bank account. Try and keep away one-fifth of your salary in this account. You can use this money to invest. Investment is what a money plant can’t do – it can actually help your money grow.
Build an emergency fund
Don’t spend the money you keep away. Build a fund that can be utilised during a financial or medical emergency. One of the ways to build an emergency fund is to invest in liquid funds. Liquid funds are short-term funds that can help build your wealth. The advantage of such a fund is that you can withdraw your investment at any point. A bank savings account is a good option too, but liquid funds provide better returns. Once take care of your emergency fund, it is important to concentrate on your medium- and long-term goals.
SIP to meet long-term goals
Mutual funds can be the answer to meeting your financial goals. That’s because you don’t need to know a lot of about the markets to invest. There are fund managers who can do the thinking for you. However, you need to do some research before choosing the right mutual fund.
Equity-oriented funds are a prudent choice for youngsters as they provide high returns in the long run. This is so because equity investments have historically done well over the long-term. But if you want to play it safe, you can opt for debt funds too. The returns may not be high but the risk factor is on the lower side. A balanced fund, which invests in equity and debt both, can also be looked at. They give higher returns than debt funds and are relatively safer than equity funds.
Investing in mutual funds is not expensive either. You can begin investing via a systematic investment plan (SIP) with as less as Rs 500 per month. You can enhance your SIP amount as and when you progress in your career.
There are two benefits of investing through an SIP. First, you get the advantage of rupee cost averaging. This means you buy lesser units when markets are high and a higher number of units when markets are low. This averages out the total cost and also protects you from market volatility. Two, you benefit from the power of compounding. Simply put, the returns from your investment are reinvested into the principal amount. Therefore, the longer you remain invested in the SIPs, the more you stand to gain from the power of compounding.
Plan to save tax
An efficient tax planning can help you save money at the end of the year. You can look to invest in a tax-saving fund. These funds can help you achieve this. Some of the popular tax-saving funds are fixed deposits, Public Provident Fund (PPF) and equity-linked savings scheme (ELSS). Among them, ELSS fund has the potential to provide highest returns. Plus, they help you save tax. An annual investment of Rs 1.5 lakh is exempted from taxes under Section 80C of the Income Tax Act. They have a three-year lock-in period but it is shorter than PPF’s, which has a 15-year lock-in period,
Save for your retirement
It’s difficult to think about retirement at the beginning of your career. But, this can be ideal if you do so. The power of compounding will ensure you have a large corpus for your retirement years.
To sum up
Do not compare yourself to your friends who may have better gadgets than you. Have patience and persist with your investment plan. It will reap you rich dividends in the future!