Entering the job market and receiving the first paycheque can be very exciting, but it could also bring along a host of challenges, which youngsters might often tend to ignore. In fact, laying down a strong financial foundation at the beginning of one’s career is the key to securing financial success in the long run.
Early financial planning at the beginning of one’s career is important, as it helps ensure enhanced financial security, lower stress levels, and accomplishment of long-term financial goals. Here, we have outlined important steps that young professionals must remember for successful financial planning.
1] Budget: Take note of your income and expenses to estimate your budget. There are many budgeting tools and apps that you can download on your phone. These can analyse your spending patterns and categorise them into different heads, thus helping you find out where you might be overspending.
Try to follow the 50: 30: 20 ratio while spending – 50 per cent on your needs, i.e. your mandatory expenses, including your debts; 30 per cent on your lifestyle and other expenses, and 20 per cent for savings. Gradually, try to cut down on your discretionary expenses and increase your savings.
2] Build An Emergency Fund: Set aside at least six months of living (mandatory) expenses to cover for emergencies. This would include things like food, house rent, utility bills, insurance premiums, equated monthly instalment (EMIs) on loans, and so on. Keep this money in a liquid fund or a bank fixed deposit to allow for quick withdrawal.
3] Maintain Good Credit: Keep a good credit score by paying your bills on time, keeping your credit card balance low, and not demanding an excess of credit. A good credit score may help you with easier loan approval in future.
4] Pay Off High-Interest Debt: Focus on paying high-interest debts, such as credit card bills. Try to pay those off as quickly as possible. You may try the avalanche method where you repay the highest interest rate first, or use the snowball method, where you pay off the smallest first.
The rate of interest on credit cards could be as high as 36 per cent on the outstanding bill. In comparison, a personal loan will have a rate of interest of around 14-17 per cent. So, if you have an outstanding amount on your credit card, it is financially prudent to take a personal loan and pay off your credit card dues.
5] Cut Down On Your Discretionary Expenses: One of the simplest ways to save money is to cut down on your discretionary spending. Identify non-essential expenditures, such as eating out, subscription services, or impulse buys, such as gadgets, fashion and lifestyle products. Consider substitutes for these expenditures, such as cooking at home, free or low-cost sources for entertainment, and putting spending limits on impulse buys. The trick is to be conscious of where your money is going, and not spend on things that are not beneficial in the long term
6] Start Saving For Retirement: Retirement would seem to be the last thing on mind for a 20-year-old, but the sooner one starts saving for retirement, the lesser he/she has to save per month to build a corpus, because of the power of compounding, and the long investment horizon.
One can explore long-term debt investment options, such as Public Provident Fund (PPF), National Pension System (NPS) or even equity-oriented products, such as large-cap equity mutual funds.
Saving early for your retirement will give you the twin benefits of disciplined investing habit and the power of compounding. Try to save at least 15 per cent of your income towards retirement.
7] Invest Wisely: Know the investment products that are available to you, such as stocks, bonds, mutual funds, debt products, and so on. With low-cost index funds and exchange-traded funds (ETFs), you can afford to think of diversified and long-term about growth. Create a balanced portfolio so that it is not heavily tilted in favour of any particular asset. This is to ensure that your portfolio is not severely affected by market movements.
8] Plan Major Purchases: Plan for your big ticket purchases, such as a house or a car by saving for the downpayment. At the time of making the purchase, try to pay the maximum you can afford as the downpayment so as to keep the loan amount to the minimum. This will help you save on the interest on your loan. Planning and researching for your purchase will help you to plan your finances properly, thus causing minimal disruption to your monthly budget.
Financial planning at an early age not only ensures stability in your later life, but also gives you the benefit of calculated expenses and more savings. But if you feel the process of planning overwhelming, you can always consult a financial adviser to curate a personalised financial plan that is best suited to your goals.