If you are Twenty-Something, and not sure if your are saving too much or too little, read on.
First, be clear that what works for someone else may not always work for you. While basic financial planning principles hold good for anybody, money management specifics have to be tweaked from person to person depending on your life circumstances. For instance, financial planning for Dinks (Double Income No Kids) will be different for Sinks (Single Income No Kids), or Silks (Single Income, Lots of Kids). Single women need to plan their funds differently than divorced or single men.
Financial planning for Twenty-Somethings:
Your money: At 25, give or take a couple of years, your whole life is ahead of you. The new job has given you something you never had before.
Your own money: No more depending on mom for pocket money and buttering up dad for that extra N 500 to spend at the multiplex. But as Spider-man once said, “With great power comes greater responsibility.” The same stands true for your money. Not that you shouldn’t enjoy it, but you need to salt some of it away so that it doesn’t run out when you’ve hung up your boots. Or fall sick.
Why saving and investing matter in the 20s:
Simple, time works in your favour. Pankaj Mathpal, Mumbai-based Certified Financial Planner, says: “The sooner you begin, the better it is. Good financial habits are best inculcated in the initial years itself.” A few years of delay in financial planning can cost you big money. For instance, assuming you are 25 and you start saving only N 3,000 a month today until the age of 50, at a 10 percent rate of interest, your money would have grown to millions. But if you start at the age of 35, the money will also grow but only less.
Your Life: They say, if you fail to plan, you plan to fail. Begin with a few goals. Says, Mathpal, “These goals you plan will be dynamic, and they could change with time. But it’s still better to start with short, medium and long term goals.” Short-terms goals could be buying a new computer, or even getting an additional degree. Something you want to achieve in the next five years or less. Medium-term goals are buying a car, a home, getting married, going on a honeymoon, planning for kids and related expenses, and also annual vacations. These goals are the one’s you want to achieve in seven to ten years. Long-term goals are planning for retirement, children’s wedding, and higher education and like. These are 20-plus years’ goals. This might sound a bit overwhelming, but it’s not.
Budget: Once you’ve made the goals the next step is to budget your monthly salary. Normally, those who are new in a job tend to have smaller salary. How much you save, spend, splurge will really depend on your income and family situation – whether your family members are financially dependent on you or not.
Insurance: How much insurance do you really need? Let’s look at two cases.
Case 1, if you don’t have dependents: Dani says, “Never buy life insurance in your 20s if you don’t have family members financially dependent on you.”
Case 2, if you have dependents: Dani adds, “And if you have financial dependents buy only term insurance.” Pure term insurance plans that come with a sum assured are cheap. The money goes to your nominees if something happens to you. If you live, you lose the money. This is not an investment, but risk-cover. May not sound too fancy, with no returns, but term insurance is cheaper than any other type of life insurance. Financial planners recommend that you have insurance cover equal to at least 12-15 times your annual expenses or 8-10 times your annual income.
Medical Insurance: As far as medical insurance goes, ensure that you have insured yourself, over and above the insurance which your employer provides. Dani says, “In the initial few years, people jump jobs very often. And in between two jobs, there is a possibility of a cooling off period, where the employers’ insurance cover is no longer valid.” It’s best to go for a basic health policy. This type pays hospital bills and reimburses expenses. You can also buy a floater policy which will cover your family too.
No parallel loan:
There is a good possibility that when in twenties you still have an education loan running. But buying a fancy bike or a car is equally tempting. As far as possible try and pay off as much as possible towards the education loan first.
Mathpal says, “Do not take any parallel loans when you already have one loan. So, don’t buy a car or home in the first few years of your job. Once you’ve settled in and know the direction your career is taking, only then take in larger debts.” We know that asking a 20-something to not use a credit card is unrealistic. But if you do use a credit card make sure you don’t ever go over the limit.
Culled from Firstpost
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