Fresh out of college and armed with a degree, straight you go into a shiny new job in a bustling city. Your journey into adulthood begins. For many, this is the first time when they earn their income, so naturally, there is a lack of money-management experience. Salaries are low and we also get carried away and spend a lot on things we don’t need.
Because of this, it’s hard to save something meaningful while living within one’s means. Stress from the first job and getting used to the new life is also a challenge, and among these problems, it’s easy to forget about financial planning. After all, who thinks about retirement when they are first starting out? Well, any financial consultant will tell you it’s wise to invest in your future as soon as possible.
So buckle up, because we’ve got some financial advice in this blog tailor-made for young adults like yourselves! Here we go!
Setting Financial Goals
Financial planning begins by setting clearly defined financial goals. These are clear targets that you aim to achieve within a specific timeframe, which can be short, medium-term, or even further down the road. Here are some examples:
A. Short-term goals (1-3 years)
Your short-term goals include the financial dreams you wish to realise within a year or three, such as building an emergency fund, paying off high-interest debt, and saving for a vacation.
B. Medium-term goals (3-5 years)
Medium-term goals can be realised within three to five years and are part of the long-term strategy. Some medium-term goals are saving for higher education, investing to buy a house or a vehicle, or investing and saving to start your own business.
It takes decades to achieve long-term goals such as saving and investing for retirement or building a fund for your child’s education, so they take patience to nurture. A goal advisor can help you define clear financial goals and get you started on goal-based financial planning.
Whether your financial goal is short-, medium-, or long-term, make sure it is SMART (Specific Measurable, Attainable, Realistic, and Time-Bound). This approach is important as it gives you a clear direction to reach your financial milestones efficiently and effectively. Be Specific, and be as detailed as you can be. Set Measurable goals, so you can track your progress towards it over time. Make sure your financial goals are Attainable and Relevant. It’s easy to get carried away and aim for the biggest goals, but one should always factor in their financial situation and set them accordingly.
Having attainable and realistic goals keeps you motivated. Lastly, your financial goals should be Time-bound so you can commit to achieving them in a defined timeframe. Here’s an example of a SMART goal – “I will save Rs. 15,000 each month for the next 12 months to build an emergency fund of Rs. 1,80,00 to cover six months of living expenses in case of unexpected financial emergencies.”
Budgeting Basics
There are two important rules you must follow – First, live within your means and second, always track your expenses. With budgeting, you can easily implement these rules to manage your finances and save. Your budget is a plan that details your income and expenses and allows you to allocate funds appropriately. Start by dividing your expenses as essential and non-essential.
Essential expenses are your ‘needs’, which include expenses such as rent/mortgage, groceries, transportation, bills, and so on. Non-essential expenses or ‘wants’ include money spent on leisure, and hobbies, such as dining out or streaming services. The income left over is your savings.
Generally speaking, you should allocate 50% of your income to your essential expenses, 30% to your non-essential expenses, and save 20%. An advantage of categorising expenses is that it allows you to identify areas where you can make cutbacks and save more. A new way to look at savings is to consider it as a priority rather than an afterthought, so when you receive your paycheck, contribute your savings first.
Like your goals, your budget should be realistic. So the 50/30/20 allocation is not set in stone and depends on your individual circumstances, such as income level, expenses, financial goals, and liabilities. Being realistic and disciplined is important as it keeps you motivated and ensures you stick to your budget and can’t just abandon it after a few months. As your financial situation changes, review your budget and adjust accordingly.
Also Read: What is Budgeting in Financial Management? Know the Complete Guide on Budgeting
Managing Debt Wisely
From paying off your education loans to accumulating credit card bills, debt can be quite a hurdle for young adults. First, let’s make it clear that not all debt is bad. If you get a loan, for say a higher education loan, then the debt can be considered an investment in your future earning potential. But if you want to buy a new mobile phone using a credit card and then struggle to pay off the balance, that type of debt is generally considered less beneficial.
So it is important to be able to differentiate between good debt and bad debt. This doesn’t mean that you shouldn’t buy using your credit card or loan service, if you are sure that you’ll be able to quickly pay it off without straining your budget then it can be a smart way to improve your credit score as well.
If you have multiple debts, then pay off high-interest debt as quickly as you can because you’ll be saving money in the long run.
It’s easier than ever today to get loans so we can be tempted to overextend ourselves financially. Have control over such impulses and think before you use your credit cards. Remember the golden rule – Live within your means.
Building a Solid Credit Score
When you apply for loans, the lenders look at your credit history which helps them determine how likely you are to repay loans you take. Those who have a good score enjoy many benefits such as increased credit limit, faster loan approvals, and lower interest.
There are several ways you can improve your credit score, the most important of which is to make timely payments of EMIs/dues. Other than that do not default on payments and clear all your existing debt. Maintaining a low credit utilisation ratio also helps. Credit utilisation means how much available credit you are using. If you use too much, that says you are having trouble living within your income. Keep an eye on your credit reports and correct any discrepancies you find.
Investing for the Future
Young adults have the gift of time, so they can start investing early and benefit from the magic of compound interest. Albert Einstein once described compound interest as the ‘Eighth Wonder Of The World’, saying “He who understands it, earns it … he who doesn’t … pays it.” This is because the interest is calculated on both the principal amount as well as the accumulated interest, so one can amass wealth due to exponential growth.
But before you start investing, you should learn about the different types of financial products such as mutual funds, stocks, digital gold, REITs, and SIPs, and the risks, taxes, and investment horizon associated with them. The assets you buy must align with your risk tolerance, time horizon, financial goals, and financial situation.
Those who are new to investing especially find it overwhelming to sift through the many options available to them, and their lack of experience can lead to uninformed decisions. That’s why it’s a good idea to consult with an investment advisor as early as possible so you can get guidance tailored to your unique financial situation. With a professional advisor’s help, you will be able to build a diversified portfolio with a balanced allocation of assets.
Protecting Your Financial Future
Another key part of financial planning is protecting your and your loved ones’ financial future from unexpected expenses or circumstances. This is done by building an emergency fund and having comprehensive insurance.
Emergency Fund: Unexpected circumstances such as a loss of employment, medical bills or car repair bills can pop up from time to time, and can potentially disrupt your finances. Sometimes, these expenses can be big enough to force you to take on debt, which can further strain your financial situation.
An emergency fund provides a financial cushion to cover such unexpected expenses. It is a reserve of cash set aside for emergencies, enough to cover at least six months of living expenses. It enables you to continue life without significantly disrupting your lifestyle. You can make your monthly SIP contributions or EMI payments, without having to take loans.
Insurance: While the emergency fund is your safety cushion, health and life insurance are your financial shields. In case of prolonged hospitalisation, the emergency fund might not be enough to cover the bills, so it’s a good idea to have a health insurance policy in place. Similarly, life insurance policies can safeguard the future of your loved ones. Some life insurances such as Unit-Linked Insurance Plans (ULIPs) combine insurance and investing, so one also gets the maturity amount back after the term. You can also get tax benefits on health insurance premiums and ULIPs.
The cost of life and health insurance premiums also go higher as you age, so another big advantage of getting insured in your 20s is that you can lock in lower premiums.
Planning for Major Life Events
Special attention should be given to medium and long-term goals such as planning for your wedding, your children’s education, and buying a house. Starting to plan for these milestones now will make sure you achieve them comfortably, without any debt. Similarly, start your retirement planning journey as soon as possible. Young adults have a higher risk tolerance than others because, in the long run, they can expect to make back any losses due to short-term volatility. That’s why it’s recommended that young adults should consider investing in equity products such as equity mutual funds. While these products carry high risk, they also offer the potential for big rewards.
Embracing Financial Education and Continuous Learning
While you’re ditching bad habits like impulse spending, it’s also important to cultivate some healthy ones such as reading books or watching videos about personal finance topics. Doing so regularly improves your financial literacy and enables you to make better decisions. Keep yourself updated about the latest happenings in the financial world. This will help you identify economic trends and investment opportunities, and keep you informed about the changes in taxation. Surround yourself with trustworthy people who are knowledgeable and experienced in finance, as they can offer you invaluable support on your journey.
Being young, no one expects you to be an expert in managing finances. Making mistakes is also expected, but what’s important is learning from those mistakes to improve your financial decision-making skills. Financial literacy doesn’t just mean knowing about different types of mutual funds or tax-saving schemes, but it’s also about growing through experience.
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Conclusion
The journey into adulthood is quite an adventure. It’s exciting, scary, and a bit confusing all at once! Sometimes, dealing with finances can feel overwhelming and that’s alright, it’s all part of the process! If you follow the tips above and set the right foundation with SMART goals and a realistic budget, keep debt under control, save and invest regularly, and have ample financial protection for yourself and your loved ones, you’ll be better equipped to handle whatever financial challenges come your way.
