To be young and not in debt

Mumbai: When you get your first salary, you are most likely to spend it on things that you enjoy doing. And why not spend it on yourself, since you have worked to earn it?

While it is good to treat yourself, you should also have a money plan in place for a smooth financial journey from your 20s to your 90s. What you do in your 20s with your money can have an impact on your financial life going forward. Here is how you can take baby steps to fulfil all your financial goals.

Discipline yourself to save regularly

To begin with you need to build a savings habit as soon as you start earning. This is going to be the foundation of your financial life.

“When you start talking to someone in their 20s about saving money, building wealth for the future and creating a corpus, especially if it is their first salary, it is not going to go down well because they are excited about the money and they want to spend it,” said Priya Sunder, director and co-founder, Peakalpha Investments.

The important thing is to get yourself into the discipline of putting aside money for expenses or investment. For instance, you can start planning for an expense such as a vacation or a big ticket purchase by saving every month.

“If you want to go for a holiday or you want to buy a bike or go for higher education in the next 3-4 years, you should keep some money aside,” said Sunder.

For most people a vacation and staying in a good hotel is a goal. Say you plan to go to Bali in April next year. “For this, work on the cost—find out the cost of the accommodation, airfare and food. Now say it is going to be ₹1 lakh. Put away money for the expense every month,” said Sunder. In this case if you put aside ₹8,333 every month, you will be able to achieve the goal and it will also not pinch you in the month you do the bookings. “Once you get into the habit of saving and understand better how savings help money grow, you will be able translate it to other goals,” she added. Start with something that interests you. Right now you are inculcating the discipline to save. Hence, it doesn’t matter what you are saving for.

Delay expense if needed, avoid credit traps

You also need to keep a track of your income and expenses. Firstly keep a tab on all your expenses both on credit card as well as debit card. There are multiple apps available which will do the work for you if you find it boring to use a notepad or excel for calculations.

“There are apps that will remind you about your bills. Analyse where you are spending. For instance, keep a track of expenses on transportation, recreation or shopping. If you track it, you will know where you are overspending. Keep a budget---20% on transportation, 20% on shopping, 30% on food and 30% on recreation, assuming there is no fixed expense such as rent or EMIs. Learn to stay within your budget from day 1, whether your budget is ₹10,000 or ₹5,000,” said Nisreen Mamaji, certified financial planner and founder, Moneyworks Financial Advisors.

If you are not able to meet your expense, don’t take loans impulsively. These days it is easy to get loan through a tap on your phone. But it also means you can get into a debt trap.

“If you can’t afford it, delay your purchase instead of taking a loan. Don’t take a loan to buy it for immediate gratification unless you are getting a great deal. Make sure your savings plan is intact. If you take a loan, you need to have a plan to repay. It can’t be vague,” said Mamaji.

If every month, you are falling short of money and taking a loan from your friends and parents, it means you are not on the right track. You need to cut down your expenses.

Start your retirement plan right away

In your 20s, you may think that retirement is far away and you don’t need to think about it. However, that is not how you should think about it. It is true that retirement is far away, but it is going to happen. And the sooner you start planning for it, the less money you need to keep aside for it.

And 20s is a good time to start planning for your long-term needs which is not just retirement but can include launching a business venture, buying a property or taking a break from work.

“These things are going to happen and the sensitivity about it needs to be taught at an early stage. Otherwise, you have to save a lot more if you start saving later in life. Around 10% of your income should be kept aside in your 20s for your long-term needs,” said Suresh Sadagopan, founder of Navi Mumbaibased Ladder7 Financial Advisories.

Initially, you may not know the exact goal. However, you should still park money aside.

“You should also resolve that you will not touch it for any situation at all. A lot of people start with the noble intention of saving for retirement in 20s and then after it gets accumulated they pay it off for, say, a car purchase. That happens a lot of times. The kitty needs to be clearly marked for long term goals,” said Sadagopan. While you take care of your present, plan for your future as well for a smooth money ride.