Financial Planning for 20-somethings

What is the right age to start financial planning? Should I start at the time of getting my first job or should I wait till I have made a lot of money? These are common thoughts in everyone’s mind.

Frankly, there is no particular ‘right’ age to begin financial planning. The only adage that one must remember is that the more time you give your money, the more it will grow.

The ‘power of compounding’ works it’s magic only with time. So the ideal time to start off is when you get your first job – in your 20s.The biggest asset that you bring to the table in your 20s is not how much you are earning, but the amount of time that you have on your side to make your money grow. The decisions and actions that you will take now will have a tremendous impact on your future. Sounds unbelievable, but it is true.

At this age, you will quite obviously not have a lot of goals (clearly visible) to achieve. This should not deter you from starting your financial planning. All that you do may not be goal-based financial planning, but there is a lot of ground-work that you can do, so that as and when your goals become clearer, you are able to align them towards your financial wellness.

Let us look at some golden rules that young people must follow in order to have a secure financial future:

i.    Open a Public Provident Fund (PPF) account at the earliest. With the limit of investment now being raised to Rs 1 lakh per annum, this is a good investment option as it offers steady (and not constant) returns. The returns from PPF are now linked to the market and will be revised annually. This can be used for tax planning.

ii.      Start by saving at least 10% of your income. This is really not asking for too much. Since there might not be any immediate goal to meet, this amount can be allocated towards funding your retirement nest egg.

iii.       Credit card outstanding– Rolling over your credit card outstanding is the worst thing that you can do. The compounding of the interest on your credit card outstanding is enemy number one. Use internal accruals as far as possible to pay off your credit card debt, immediately. Each day of delay is only going to cost you more. If you are unable to figure a way out, ask your financial planner for advice.

iv.        Smart use of your credit card – At this age, the tendency to splurge is immense. With little or no liabilities, one tends to spend beyond one’s income, all thanks to your credit card. The credit card is a useful tool, if used wisely. Unchecked spending can lead you to a debt trap. The idea is to use your credit card wisely such that it improves your lifestyle and does not ruin it.

v.        Education loans – They provide you with a certain amount of tax benefit. So it is not wise to rush to pay them off immediately. Use the tax benefit to your advantage. Pay it off only if the equated monthly instalment (EMI) becomes a burden on your finances.

vi.       Get an Emergency fund in place. This is nothing but putting away about four to six months of your expenses into a debt instrument (which can be liquidated immediately) to take care of any unforeseen expenses. The investment value of this amount should not fluctuate, though the returns should be optimal. The idea is not to generate huge returns, but to have money at hand if the need so arises.


vii.         Life insurance– Generally speaking, there are no dependants at this age. Hence, there is no necessity for insurance. Quite contrastingly, a number of people end up investing in insurance products (with little or no knowledge of the product) as the agents are able to show them a ‘bright and rosy’ future (simply because of their young age). You need to take life insurance cover only if there are people dependant on you and your income or if there is an asset (like a home) that you are purchasing by taking a housing loan.

viii.        Health insurance – This is one cover which should be taken up immediately. It does not cost much at a young age, but provides security against unforeseen health-related expenditure.

ix.       Personal loans – This along with credit card outstanding is a very common reason why youngsters fall into debt traps. The idea of swapping loans and outstanding from one bank to another may look very wise on paper, but it is only postponing the inevitable. Hence, avoid personal loans as you would avoid extravagance on your credit card.

x.       CIBIL scores – Thanks to technology, now your financial transactions (like credit card repayment and roll-over, cheque bouncing, non-payment of EMIs on various loans taken by you, delay in paying your liabilities, etc.) are recorded and monitored by Credit Information Bureau (India) Ltd., (CIBIL). Your CIBIL scores play a vital role in the sanction of loans in the future. So if you spoil your rating at such a young age, you will find it hard to get loans in the future for your house or your child’s education, etc.

If you can start off at this young age and plan your path methodically along with your financial planner, you can achieve all your dreams. The most important step is the first one as that decides whether you will create the path to your financial wellness or not. As Martin Luther King Jr. put it “Take the first step in faith. You don’t have to see the whole staircase, just take the first step.”