If you are Twenty-Something, and not sure if your are saving too much or too little, read on.
First, be clear that what works for someone else may not always work for you. While basic financial planning principles hold good for anybody, money management specifics have to be tweaked from person to person depending on your life circumstances.
For instance, financial planning for Dinks (Double Income No Kids) will be different for Sinks (Single Income No Kids), or Silks (Single Income, Lots of Kids). Single women need to plan their funds differently than divorced or single men. Keeping these case specific circumstances in mind, Firstpost brings you a weekly series on financial planning for your cases that look like yours.
We begin with financial planning for Twenty-Somethings. Next week we will look at options for the average nuclear family, then money management for single women, followed by financial planning for those in 50s and like.
Your money: At 25, give or take a couple of years, your whole life is ahead of you. The new job has given you something you never had before. Your own money. No more depending on mom for pocket money and buttering up dad for that extra Rs 500 to spend at the multiplex. But as Spider-man once said, "With great power comes greater responsibility." The same stands true for your money. Not that you shouldn't enjoy it, but you need to salt some of it away so that it doesn't run out when you've hung up your boots. Or fall sick.
Why saving and investing matter in the 20s: Simple, time works in your favour. Pankaj Mathpal, Mumbai-based Certified Financial Planner, says: "The sooner you begin, the better it is. Good financial habits are best inculcated in the initial years itself." A few years of delay in financial planning can cost you big money. For instance, assuming you are 25 and you start saving only Rs 3,000 a month today until the age of 50, at a 10 percent rate of interest, your money will grow to Rs 38.9 lakh. But if you start at the age of 35, the money will grow only to around Rs 12.5 lakh. That's a difference of Rs26 lakh which ten years can make. So, it's smarter to begin early.
Your Life: They say, if you fail to plan, you plan to fail. Begin with a few goals. Says, Mathpal, "These goals you plan will be dynamic, and they could change with time. But it's still better to start with short, medium and long term goals." Short-terms goals could be buying a new computer, or even getting an additional degree. Something you want to achieve in the next five years or less. Medium-term goals are buying a car, a home, getting married, going on a honeymoon, planning for kids and related expenses, and also annual vacations. These goals are the one's you want to achieve in seven to ten years. Long-term goals are planning for retirement, children's wedding, and higher education and like. These are 20-plus years' goals. This might sound a bit overwhelming, but it's not.
Budget: Once you've made the goals the next step is to budget your monthly salary. Normally, those who are new in a job tend to have smaller salary. How much you save, spend, splurge will really depend on your income and family situation - whether your family members are financially dependent on you or not.
Case 1: If you earn Rs 12, 000-15, 000 monthly, most of your salary will go for living expenses. Irrespective of how much you earn, you should out aside at least 10 percent of your monthly income in the initial few years of your job. As your salary grows, in years increase this percentage.
Case 2: If you earn a higher salary of Rs 30,000-50,000, you should ideally spend 60 percent on all expenses and the remaining 40 percent should go towards savings. Ranjit Dani, Nagpur-based Certified Financial Planner, says, "Instead of using the equation of income - expense = savings, you should use the equation income- savings = expenses. Which means, decide how much you want to save in advance, and then plan your expenses accordingly." So, the age old principle of pay yourself works.
Insurance: How much insurance do you really need? Let's look at two cases.
Case 1, if you don't have dependents: Dani says, "Never buy life insurance in your 20s if you don't have family members financially dependent on you."
Case 2, if you have dependents: Dani adds, "And if you have financial dependents buy only term insurance." Pure term insurance plans that come with a sum assured are cheap. The money goes to your nominees if something happens to you. If you live, you lose the money. This is not an investment, but risk-cover. May not sound too fancy, with no returns, but term insurance is cheaper than any other type of life insurance. Financial planners recommend that you have insurance cover equal to at least 12-15 times your annual expenses or 8-10 times your annual income.
Medical Insurance: As far as medical insurance goes, ensure that you have insured yourself, over and above the insurance which your employer provides. Dani says, "In the initial few years, people jump jobs very often. And in between two jobs, there is a possibility of a cooling off period, where the employers' insurance cover is no longer valid." It's best to go for a basic health policy. This type pays hospital bills and reimburses expenses. You can also buy a floater policy which will cover your family too.
No parallel loan: There is a good possibility that when in twenties you still have an education loan running. But buying a fancy bike or a car is equally tempting. As far as possible try and pay off as much as possible towards the education loan first.
Mathpal says, "Do not take any parallel loans when you already have one loan. So, don't buy a car or home in the first few years of your job. Once you've settled in and know the direction your career is taking, only then take in larger debts." We know that asking a 20-something to not use a credit card is unrealistic. But if you do use a credit card make sure you don't ever go over the limit. You should normally pay the total amount due and avoid rolling over credit for more than couple of months.
Savings and Investments: While an age-based investing strategy works, see if the glove fits. This strategy holds that you should invest a higher amount of your savings in equity and a lower portion in debt instruments when you are young. So, if you save Rs 5,000 a month, and you are 25 years old, you should have Rs 3,500 in equity in form of an systematic investment plan in equity mutual funds. Dani says, "But this financial wisdom might not work for you in certain cases. For instance, if you plan to study in a few years, or have another fixed-non-negotiable personal goal, you will need to build a corpus, and you cannot expose yourself to equity risk. In such a case, investing a bigger portion in a low-risk or no-risk debt instruments works better."
Planning for retirement: It is also not something you should ignore either at 25 - even though retirement is far, far away. Mathpal says, "You should start planning for retirement as soon as you begin working." Your employer will open an Employees' Provident Fund account for you. But that's definitely not enough. Open a Public Provident Fund account which is a zero-cost, risk-free and tax-free debt instrument. Other than these, you could also consider the National Pension Scheme (NPS), where your money gets locked till you turn 60.
In sum: Spend a little, save a little, figure out your financial goals, make a plan, see where your career is heading and have fun.
Note: Next week we bring financial planning for the average nuclear family. The money management tips for TwentySomethings won't work for a family of four. So watch this space.
Published Date: Aug 18, 2012 04:05 pm | Updated Date: Dec 20, 2014 07:25 pm