Building wealth is a goal that we all aspire to achieve, regardless of one’s age or financial situation. Whether you are just starting your career or nearing retirement, effective financial planning can help you secure your financial future. Although financial planning is not a one-time affair, you can develop a well-thought-out financial plan for every stage of life by setting clear goals, creating a budget, making prudent investments, and exercising discipline and dedication.
Financial planning in your 20s
You are just beginning your career in your 20s. This is a time when you have lesser responsibilities, and you will tend to spend money on yourself. Even though time is on your side, your spending habits may not be fully established. This is also the right time to start building healthy financial habits, such as prioritise spending, establishing good credit, and saving money. Your financial security as you age depends on the decisions you make now. Therefore, before creating your financial plan, it’s crucial to have a sound understanding of personal finance and investment at this age.
Set a budget: Do treat yourself occasionally to things that truly enrich and help you. But remember not to spend more money than you earn! Making a budget is an important financial step that will help you organize your finances and keep track of your money.
Build your emergency savings: Save a little bit each month to build an emergency fund by making sure you have 3-6 months of expenses saved up.
Start investing: As you are young and have time on your side, you can take on a higher level of investment risk. Greater exposure to equity and other high-risk-high-reward investments means the potential for higher returns. If you are new to investing, you can start investing in mutual funds, as they are managed by professionals. You can start by investing small amounts through SIPs and investing consistently across the length of your professional career can result in excellent returns over time. You could consider investing in equity schemes if your goals are long-term and debt schemes if your goals are short-term.
Get health Insurance: If you buy a health insurance policy in your 20s, you can enjoy lower premiums. Because as a person ages, the health risks will increase and so the premium also increases with the increase in age. There is no waiting period, you can also get a no-claim bonus on the insured sum for not filing any claim and you can also avail of tax benefits.
Financial planning in your 30s
Many of your personal milestones, such as getting married or buying your first home, starting a family, or advancing in your career are achieved during the 30s. These are all big money moments, and financial planning can help you achieve these goals and boost your sense of financial confidence. Since you will likely be financially stable at this point, your financial plan in this stage should adapt to your new requirements.
Whenever you can, increase your savings/ investment rate: Most financial experts recommend using the 50-30-20 rule, where 50% of your expenses must be spent on needs, 30% on wants, and the remaining 20% must go into savings/investing. This guideline can be slightly modified in your 30s to save more and spend less by adjusting the proportions by increasing the savings/investment from 20% to about 30% can work.
Diversify investment portfolio: The rule is simple: begin investing in your 20s and diversify in your 30s! You can reduce investing risk by creating a diverse portfolio. Having a diversified portfolio is advisable even if you have a high tolerance for risk because you can safeguard your wealth to a certain degree. If you have an aggressive risk appetite you may choose to invest 70% in equity, 20% in fixed income, and 10% in gold. If you have a moderate risk appetite you may invest 60% in equity, 30% in fixed income, and 10% in gold. And for someone with a conservative risk appetite it may be ideal to invest 40% in equity, 50% in fixed income, and 10% in gold It would be prudent to consult a certified financial planner, who will provide you with a personalised financial plan after taking into consideration your assets and liabilities.
Start Retirement Planning: Retirement plans are essential for a secure future. Start investing regularly, so that your retirement corpus benefits from the power of compounding, given the longer period available to build the corpus. You can select from a wide variety of investment avenues in the financial markets or from the various government-sponsored retirement-oriented schemes as well. Some of the saving and investing choices for retirement planning include bonds, Public Provident Fund, various Post Office Savings Schemes, bank fixed deposits, National Pension schemes, solution-oriented category MF schemes (Hybrid funds), etc. By investing towards achieving this financial goal in your 30s, you can maintain a good standard of living even in your old age.
Insurance is a good idea: The untimely demise of the breadwinner can lead to financial and mental distress. Life Insurance plans serve as a safety net for your family and can also be an efficient retirement plan. Healthcare inflation is on the rise, and you may want to upgrade your health insurance for you and your family is prudent to safeguard yourself from any unforeseen medical expenditures in the future. A single-shot upgrade might need a higher premium, which may hurt your savings. As an alternative, targeted upgrade may be considered for, say, every 7 to 10 years.
Reduce debt and keep track of your credit score: Your credit score and credit history reflect how you managed your debt early in your career. 30s is the time when you may be thinking of availing large loans such as home loans. Your ability to borrow money will be constrained if you have a low credit score, which could have a long-term negative impact on your finances. Build a responsible credit behaviour pattern by being disciplined while utilizing credit and meeting obligations on time.
As you grow older your income rises and you start to build your savings and accumulate assets, it’s also important to protect your wealth for your family. In the next article, we will discuss financial planning for those in their 40s and 50s.