Managing your personal finance has to be one of life’s top priorities. If your finances are healthy, they can help you and your family lead a happier, more fulfilled life.
If you are about to or have turned 30, you must pay special attention to personal finance. The age of 30 years is an optimal stage – neither too late nor too early — to set forth on your financial planning journey. Any further delay may result in slow but steady collateral damage, depriving you of the high potential of wealth generation your little but regular investments can yield.
Adhil Shetty, CEO, BankBazaar, says, “When you’re in your 30s, you have many factors working in your favour. You are young and relatively healthy. You are likely to have a good risk appetite and may be looking at another 30 years of employment ahead of you. But the most crucial factor you have going for you is time. With 30 more years of income generation remaining, you have 360 months to invest and 30 years’ worth of compounding gains to benefit from. All these factors, when harnessed optimally, can significantly impact your wealth generation journey.”
Here are some quick tips about how you should go ahead with your financial planning at the age of 30.
1) Save More to Invest: Savings are important. You should aim to save no less than 25% of your total monthly earnings. If the proportion can go up, the better it is. Let’s assume your monthly salary is Rs 40,000; ensure that a fourth of it, or Rs 10,000, must be saved while restricting your expenses to Rs 30,000. As the salary increases, the same proportion of savings should continue unabated.
2) Investment Strategy: Don’t let your savings remain idle in your bank account. One should typically be ready for yearly inflation of 5% through life. For wealth generation, you have to put money in avenues which effectively beat it with a wide margin in the long run. Make a list of your financial goals and work on achieving them through investments. Following are the options you may consider for investments.
a. Invest in Equity Oriented Tools: If you are young with a good high-risk appetite, consider investing in equity-related products. Ensure you have 80% exposure in equity tools. Currently, it would mean Rs 8000 from the saved Rs 10,000. Investments in equity mutual funds through a systematic route (SIP) are an ideal way to start and continue with. While doing so, put a top-up of 10% increase, which enables you to automatically invest 10% more after a year, and there on as the salary rises.
With this strategy, you will end up investing a total sum of Rs 15.3 lakh and the value of that will be a little above Rs 30 lakh by the time you turn 40. This carries an assumed rate of return at 15%. Further, if you continue till your retirement at 60, the total value of your investments will stand at a whopping Rs 10.12 crore against an overall investment of Rs 1.6 crore. This is the power of compounding as the number of years spent in the market increases.
b. Allocate 15% of your portfolio in debt instruments: After allocating 80% to equity instruments, you should take an exposure of 15% to debt investments. You may invest in Public Provident Funds (PPFs), your office’s Provident Fund, debt mutual fund schemes and the banks’ fixed deposits. All these schemes will help in stable returns, if not inflation beating.
c. Invest 5% of your portfolio in Gold: Gold as an investment offers you a strong hedge against inflation. It is advisable to keep an allocation of not exceeding 5% in gold related instruments like Gold ETFs and Sovereign Gold Bonds (SGBs). Avoid buying physical gold in the form of jewellery or coins.
3) Get yourself adequately covered: Buy proper traditional term insurance with a minimum cover of Rs 1 crore. For health cover, you may consider a sum assured of a minimum Rs 10 lakh to begin with. Such an adequate insurance cover greatly helps in keeping your financial planning intact and does not unnecessarily dent your pockets with unexpected medical expenses.
4) Build Emergency Corpus: A readily available emergency fund, not less than 12 times of your monthly income, should be a priority to build. You may either keep this money in your savings account or invest it in a liquid mutual fund scheme. You may use your annual incentives, bonuses or other reimbursements, apart from your income, to create a sizable emergency fund. This comes handy in over tiding the rough waves in times of sudden personal emergencies.
5) Delay property buying: If you already have a home – be it your parents’ home, accommodation provided by your employer or a rented home – it is recommended not to get into property shopping on loan at least for a decade, if not more. Continue with what you have. It is for the simple reason that home buying is the biggest ticket size purchase of anybody’s life with a repayment commitment of nearly two decades. And in the process, you may miss the opportunities of investing in high yielding growth instruments as the home loan EMI will take away a sizable share of your savings.