Personal Financial Management in your 20s

For those you in your twenties, you are feeling this is the best time of your lives. You are absolutely right. Gone are the days of financial dependence on your parents, you have chosen a career for yourself, some of you are probably making decisions about marriage and family, but most important of all, you are feeling that you have achieved a sense of financial independence. Congratulations, this is a very important stage of your lives, because the most important aspect of your life is that it is changing. Change is a way of life, and the more things change early in your career, the more stable is your financial foundation that you will set for yourself, provided of course, you have a plan. We have listed 10 important principles, which if adhered to, will set you on the path of financial success in your life:-

1. Have a financial plan:

   We need to think ahead in life. We need to have goals and a roadmap, without which we are a rudderless ship, drifting in strong currents. It is not enough having long term goals, we need to have short term, medium term and long term goals. Goals may change with the changing situations in our lives, but it is always very important to have objectives. Once we reach our twenties, we should have enough maturity to set ourselves short term goals (3 to 5 years), medium term goals (5 to 10 years) and long term goals (15 to 20 years). Once we have goals, we know what we are working towards. As in a project in your job, unless you have clear objectives, you cannot define what success looks like. Once you set your goals, you can embark upon the most critical task of financial management, which is budgeting and then executing on your plans



2. Importance of saving:

   We all work very hard for our pay cheque. The first person that should get rewarded when the pay cheque comes is you, the person who worked so hard for that pay cheque. When you decide to buy a designer jacket or celebrate in a pub, with your pay cheque, there is no doubt those are rewards well earned. But along with you, you need to be aware that the designer label or the pub, are also earning profits, for your gratification. On the other hand, if you set up mechanisms to divert a portion of your savings to a recurring deposit or a systematic investment plan, it is you and only you, that is getting the reward. There is nothing wrong with gratification. We fully deserve the gratification, since we have worked hard for it, just that we need to be aware of cost benefit analysis of instant gratification versus future benefits. If we understand the benefits of compounding, I am sure, we will set aside a portion of our incomes as savings. If you divert a portion of your savings in a disciplined fashion either through recurring deposits or a systemic investment plan (SIP), it will go a long way in creating wealth for you



3. Have a simple / frugal life:

   Simple or frugal lifestyle does not mean less exciting lifestyle. It only calls for more awareness and discipline. Cooking your own breakfast or dinner can save you many thousands in expenses, every month. It is not rocket science, actually cooking can be quite fun, since you are learning a new skill. Cooking your meal, is almost always less costly than eating out, and definitely a healthier option, since you are in control of what you are eating. Similarly, if you use public transport instead of cabs, your savings will be higher. Again the main question is of balance, if you are in hurry and can afford it, by all means take a cab, but if you plan ahead and are able to save money by taking a bus, on an aggregated basis, it will go a long way in meeting your financial goals many years later. Similar is the question of your next purchase, be it a designer label or the new smart-phone on offer. The choice is yours. It is your life, and therefore you are entitled to the choices you make. Just make sure, you are aware of the cost benefit analysis.



4. Try your best to be debt free:

   If you are revolving your credit card debt, make a careful analysis of your debt and try to pay off outstanding balances, to the extent possible. If you have debts from the past like a student loan, make sure you have a plan to repay back the principal. The interest rate on non-mortgage debt is higher, and you should be free from it. The last financial crisis was caused by over leveraged individual balance sheets, let us learn a lesson and try to be free from debt, to the extent that is possible. Some of you may have taken automobile loans for two wheelers or four wheelers. Firstly, you should economize your purchase, and whenever you have an opportunity, in terms of excess cash flow, try to repay the principal of your debt. It will lessen your interest burden, and increase your savings.



5. Have a systematic investment plan:

   The earlier you start investing, the better for you. That goes without saying. The principles of compounding come into play, when you invest earlier. Let us take an example. If you start investing Rs 2000 per month from the age of 25, till your retirement, the compounding effect with a return of 20 – 22%, the long term compounded annual return on equities, will ensure a corpus of Rs 3 crores plus by the age of 60. Just to illustrate, the power of compounding on a long term basis, please look at the table below:-

   Amt Invested per month	Rate of Return	Period	Amt Total Invested	Expected Corpus
   2000	20%	30 yrs	720,000	30,879,750
   5000	20%	30 yrs	1,800,000	77,199,375
   2000	15%	30 yrs	720,000	11,133,117
   5000	15%	30 yrs	1,800,000	2,7832,793

   This is very powerful. Have a systematic plan and stick to it.

6. Invest in yourself. It is best investment that you will ever make:

   You can save as much as you can by cutting down on expenses. However, you will agree that a better option is to earn even more. The key is to build marketable skills. Your earning power is rooted, in your education and your job skills. While it may vary from situation to situation, it is always a terrific idea to invest in yourself, be it in terms of arming yourself with an education qualification that helps you get better pay, or job experience that helps you do the same. Either ways, financially or otherwise, it is a very wise investment.



7. Make sure you have a strong credit rating:

   Be it in terms of paying your credit card bills on time, or ensuring that you have a strong automobile insurance record, there is no substitute of having a strong individual credit rating. It cuts down your cost significantly, and all it takes is a bit of caution and discipline on your side.



8. Try to be financially independent:

   If you are living with your parents, consider it as a privilege from a financial perspective. Others are not as lucky as you are, but do not let that absolve you, from your financial responsibilities. Benchmark yourself, against your peers, who are living independently. Save money for your parents, after all, saving money for yourself since, it is more likely than not, you will inherit it. Their money is your money.



9. Be judicious about expenses in the wedding:

   This is a tricky topic. As Indians, we spend a lot of money on weddings. It is a cultural thing. But as many television shows, or your own experience tells you, we spend too much. Whether you spend your own money or your parent’s, it does not matter. A few smart ideas in savings on wedding expenses, goes a long way in building assets, in our married life. Wedding is a once in a lifetime thing, there are cultural and family aspects involved. But the married life is much longer than the single day of the wedding. Let us be judicious about it, and make it the happiest event, from a long term perspective.



10. Indentify and build a relationship with a Financial Advisor:

    To help you set yourself on the path of financial success, you can enlist the help of a professional financial planner. The financial planner will work with you, to analyze your financial goals, and help you prepare a plan that will ensure that you meet your goals. The relationship with your financial planner will be ongoing, and the financial planner will ensure that you stay on course. If at any point of time, your goals or your financial situation changes, your financial planner will ensure that you have an actionable plan that meets your financial objectives.



11. Have some fun:

    These are the best years, of our lives, no doubt about it. Go on the vacation that you always wanted to. Take the educational course that you think will add value to you. Enjoy the honeymoon that you as a couple always had wanted to. This time, will never come back again. Build some great memories that you will cherish throughout your lives. But build some savings and investments for yourself. The 30s are approaching quickly, and so you need to put yourself in the best position to make the most out of your thirties.

    We will have an article on personal financial management in your 30s, but while in your 20s, make sure that you prepare yourself for the next exciting stage of your lives, the 30s.