Whether you have just stepped out of your college on to your first job or a few years of work experience and nearing your 30s, finance is something you cannot ignore. You like it or no, money could be counted among the necessities of life, no matter at what stage of life you are.
This might be a stage in life when career, partying and exploring the world may be your priorities. But, at the same time, it is important to understand that without strong backing from your finances none of the above may be possible.
When it concerns finance, the earlier you plan, the better. So, it is good not to postpone decisions regarding finance and associated matters to a later point in life.
Keeping all these factors in view, here is a personal finance checklist that should be useful for everyone in the 20s.
Track Your Expenses
You must be excited that you have finally moved from the student phase of your life to an earning phase. It is easy to get overwhelmed and start spending recklessly on various lifestyle expenses like buying clothes, ordering food and going out with friends.
It is important to keep an account of discretionary (rent, EMI, etc) and non-discretionary expenses (eating out, buying clothes, etc) in a month, so you are aware of the expenses being incurred out of your income.
Set Your Goals
It is very important that you set goals that you want to achieve in life. It could be to set up a venture of your own or taking a year off to travel or even buying an asset like a home or a car.
Decide the timeframe in which you must achieve this goal of yours. It could be 5, 10 or 15 years down the line. Also, try and put a figure that you would require to achieve this goal so that you can start working towards the same.
Build a Habit of Saving and Investing
Once you have a goal in place, you should start saving towards your goal. You can do this by saving a portion of your income. Just saving the amount is not good enough. Money in your savings account will not grow fast enough to meet your goal. Learn about various avenues of investment available and choose to invest in one according to your risk profile.
Create An Emergency Fund
As you save for various goals of your life, you should also try and set aside at least 6 months’ worth of expenses in a separate kitty. This should help you sail through if there is an emergency in your life. It could be a medical emergency, closure of your company or any reason when you cannot work and earn.
Use Credit Diligently
Now that you are earning, you will have better access to loans and credit cards. However, it is good that you make use of cards and loans very diligently. Over usage of cards and applying to too many loans can create problems in maintaining your financial balance. Apply for a loan only when you need one and keep it to the extent that you can comfortably repay.
Pay Attention to Your Credit Score
A credit score has become another metric that will have to be maintained well. A good credit score is extremely important to avail any kind of credit. It is important to make credit card payments and EMIs on time when you avail of a loan or use a credit card. This is important so that whenever you require credit in the future, it is available to you on favorable terms like a lower rate of interest.
Start Saving for Your Retirement
Retirement seems to be quite far off especially when you are still in your 20s. However, as the adage holds “Slow and Steady Wins the Race”, it is important that you start putting aside a small amount towards your retirement kitty as soon as you start earning. Your amount will get compounded over the years and make saving for retirement a less taxing tax when in your 40s or 50s.
Insurance is another disregarded concept among the youth. Even if you do not have a family of your own, do not forget you might have dependent parents. So, buying life insurance and medical insurance policies earlier will be a good move as your premiums will be lower at this stage.
A good piece of advice here would be not to mix up insurance and investment. An insurance policy should not be bought as an instrument of investment.
Use the Right Avenues for Tax-Planning
As soon as you start earning, taxes are another factor that you will have to start considering. There are various sections of the Income Tax Act that gives your benefits for savings on different accounts like PPF, Insurance premium paid, HRA benefits, etc. Calculate your tax in advance and make investments in tax saving instruments sensibly.
Do not keep this till the month of March, when individuals very often mix up concepts of insurance, tax planning, and investment.
It is possible that all these terms sound very overwhelming to you as a young professional. If required, you can always choose to seek the advice of a financial planner or read up from various sources available online.