Most new employees get their first paycheck when they are in their mid 20s. What remains common among them is a rough plan that most of them make up in their mind as to what to do with their income especially during the initial months. A portion may go into buying that much-desired electronic gadget or a new dress, while another portion may go as dining and entertainment expenses with friends and so on. A sense of satisfaction may emerge if they find their savings account still in green and growing on a monthly basis.
While spending on oneself is absolutely fine, beginners who have started earning recently need to revisit this mindset and give a serious thought to the whole idea of earnings, savings, spending and investing. “Young adults must imbibe financial planning and discipline early on. This ensures that saving money becomes a regular practice for life, and there is always a ready corpus available for several important milestones later in their lives. It is important to understand current income levels and spending patterns, and achieve a balance,” says Navin Chandani, MD & CEO, CRIF High Mark.
The earlier they begin to save, the lesser they will require to set aside and will be able to harness the power of compounding much better. To start with, youngsters can remember to stick to the formula of ‘Income minus savings equal to spendings’. Out of the income they earn, make up a plan to save a certain amount religiously each month. Even if you are able to invest a small amount, it will help you make the right beginning. By saving Rs 2000 a month for 30 years, you could accumulate approximately Rs 70 lakh assuming a growth of 12 per cent per annum.
As of now, you may not be in a position to fix goals such as your own marriage, family or buying a home. It will be better to fix a percentage that you are willing to save from now on – it could be 5 per cent, 10 per cent or 25 per cent of your monthly salary. Over time, you may review it and enhance it based on your upcoming goals.
Here’s a quick checklist from Chandani that every young adult may follow to start saving:
Create a budget – Creating a monthly budget of income and expenses is the first step to understand if you are spending on basic needs or luxury items
Follow the budget – Your savings should be at least 25% of your income every month and sticking to the budget is an effective way to achieve that
Pay on time – Make sure that all your payments are made on time
Start Investing – From the savings every month, set aside funds for investments that are expected to appreciate in value over time
Use the power of compounding – This will help you create wealth and stay disciplined
Protect yourself – Invest in life and health insurance plan to take care of any unexpected contingencies
Have an emergency fund – Create an emergency fund apart from daily investments to cover unexpected expenses, ensuring that savings are not depleted
Start building a good credit score – It will assist in obtaining good credit opportunities at any point in life
As age is on your side, making use of equities as an asset class may be preferred. You can be aggressive in investing a higher percentage of your savings in equities. Start with index funds and over time add mid-cap funds to the portfolio. Investing through SIPs helps in inculcating the habit of savings and meet long term goals as and when they arrive at various stages of life. Debt funds may be used only when the goals are around 3 years away. Park funds in a bank account only for meeting emergency funds and not for long term goals.
Your goals of buying a car, home and even arranging funds for your own marriage may come from your own savings. The less you will have to go for loans, there will be that much less interest outgo. When it comes to investing, avoid procrastination and make a beginning.