Three easy hacks for becoming money-savvy in your early 20s
Updated: Jun 8, 2020
Our first job and first salary bring us unparalleled happiness. These are our first steps to becoming financially independent. With this new-found freedom, comes the responsibility of managing our own money. For most of us, the world of investment is complex, and generally better left to our parents or elders to manage.
However, times have changed. Both investment products and technology have evolved. Taking charge of our money matters is now easier than ever before. Even if we are just getting started. Here are three simple steps to build a solid financial footing:
1. Pay off your loans and avoid getting into a debt-trap :
At this point, you might have an education loan or are getting started with a car loan. Prioritise taking a car loan only if absolutely necessary. In case you have an education loan, consider the fact that your education loan payment also gives you tax breaks. If you end up paying off your loans earlier than anticipated, the amount that otherwise went into your EMI could be redirected to a future goal through a SIP.
As you start earning, you likely have aspirations for a better life. You may be tempted to explore all those personal loans and credit cards which are at your disposal. Avoid lifestyle-linked debt, which is the first and most basic lesson in becoming wealthy. These are extremely high-interest loans and could quickly become a debt-trap that’s really hard to get out from.
If your credit card bill is higher than your monthly salary, consider this a serious red flag. Every ₹10,000 unpaid on the credit card costs approximately ₹14,500 per year, i.e. nearly 45% yearly interest! No investment product anywhere in the world will beat that return consistently. Credit card debt is known to be the most expensive loan you can take!
2. Invest in mutual funds through a SIP for your next big goal(even retirement)
Write down a money goal. It could be wanting to buy your own house in another five years or creating a travel budget for your trip to Amazon rainforests after two years or to retire by the age of 35.
Choose at least one major goal, write it down and stick it where it’s visible every day. Now work backwards to know how much your monthly savings need to be to hit this goal. There are several goal calculators, including one available on the Basis app, to help with this.
It might be hard to imagine the impact so let’s take an example: A 25-year-old investing ₹20,000 per month into an equity mutual fund which gives an annualised return of 12% per year, would end up having ₹1 Cr by the age of 40.
If the same person started investing at 32, precisely the same amount in the same mutual fund (₹20,000 with an expected return of 12% per year), would end up with ₹32 Lakhs by the age of 40.
That’s the power of investing young – a whopping ₹68 Lakhs additional!
Another way to look at this is, to become a billionaire ( In Indian Rupees ) by the time she is s40, the 32-year old would need to save ₹65,000 per month, a milestone which was achieved by the 25-year old with merely ₹20,000 per month. There is no turning back time. So, choosing investments early has highly valuable benefits.
While a life insurance policy might not be necessary when you start your career right after college (in case there are no dependents), make sure to cover for medical emergencies. A part of growing up is taking responsibility for unforeseen circumstances which could burn a hole in your or your family’s pocket. Given the adventurous lifestyle choices as a young freewheeling 20-something-year-old, backing this up with substantial health insurance and an accidental cover is a must.
One of the most significant advantages of starting health insurance in your 20s is the low premium, no waiting period for critical illnesses, which might arise later, and the additional tax benefits available under section 80D.
An annual premium for a ₹5Lakh cover for a 25-year-old could be as low as ₹4,500, while the same ₹5Lakh cover at the age of 38 years would cost upwards ₹7,000 per annum (for an individual plan). Considering the option of a family floater in the 30s (individual + spouse/ children/parents) would take this amount even higher to ₹11,000 per year.
To choose the one most suitable one for you, compare health insurance policies available with features such as :
claim settlement ratios
accidental cover if any
no claim bonus benefits attached
These good money habits applied early in your life are sure to set the stage for your future financial well-being. The best time to get started is now!