A chunky part of your income will go towards fulfilling your basic needs. It will include items like paying rent, utilities, groceries, conveyance costs, medicines, insurance along with your EMIs. These are the mandatory expenses that need to be met every month.
In their 20s most people set the foundation of their career. People at this age explore different fields and are busy deciding how they want to unfold their career, and start earning. However, most at this stage also struggle to manage their finances. It is a challenging time for many as with limited income, you have to balance your expectations, wants and needs. Experts suggest that the financial habits one develops during this phase help one in the long run, both personally and professionally.
Find out how you can spend your money wisely without cutting down on discretionary spending:
The essentials – 50 per cent
A chunky part of your income will go towards fulfilling your basic needs. It will take up almost 50 per cent of your salary. It will include items like paying rent, utilities, groceries, conveyance costs, medicines, insurance along with your EMIs. These are the mandatory expenses that need to be met every month. Hence, you should aim to spend approximately 50 per cent of your take-home income on these items.
- Rent: Your rent will include maintenance fee along with utilities which typically takes the largest part of your monthly expenses. However, if your rent takes away most of your fixed expenses, you can also consider moving to a house with lower rent or splitting costs by sub-leasing your accommodation.
- Debt: Most people in their 20’s have either a student debt, credit card outstanding, or any kind of loan. You should prioritize repaying those loans or dues before making discretionary expenses. You should use any excess income to repay your debts first, as the sooner you are out of debt, the quicker you will have more disposable income.
- Insurance: It is imperative to opt for a health cover as the medical cost in India is skyrocketing, even if not a life cover at this age. You should opt for a health cover up to ranging between Rs 3 lakh and 5 lakh, or more if you don’t mind paying higher premiums. You can opt for a term life insurance in case you have dependents, or else you can push for some time. Additionally, depending on your hereditary risks, you can also consider opting for a critical illness insurance cover against diseases such as cancer, which are generally not included in normal health insurance policies.
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Savings and investment – 30 per cent
Saving from this early age will add to your benefit. However, while deciding, link your investments to goals. For instance sort out your short, medium and long-term goals and then start investing for them. For example, just Rs 3,000 invested monthly in a mutual fund generating annual returns of 12 per cent will get you a corpus of Rs 1.9 crore in 35 years. As your income increases, you can increase your contributions towards your goals.
- Long term: For long-term investment options such as EPF and PPF can be considered especially for goals that are more than 10 years away. Among all small saving schemes, EPF and PPF can fetch you one of the highest rates of returns. Also, start investing in equity and equity mutual funds when you’re young. In the long-term, these investments can easily get you upwards of 10 per cent returns annually.
- Short & medium term: You can go with debt-oriented options like deposits and debt mutual funds, for short and medium-term goals.
- Emergency fund: Most importantly, build a contingency/emergency fund worth 6-12 months of your regular income. In case your regular income stops or during any emergency, this will cover your expenses. For this goal, you can invest in debt mutual funds, savings accounts, fixed deposits, and recurring deposits.
Discretionary expenses – 20 per cent
This is your ‘For having fun’ part of your income. At this age making lifestyle spending such as on gadgets, clothes, eating out, vacationing should form the smallest part of your budget. If you’re going above the 20 per cent threshold, try cutting it down till your income increases.