As we grow older, we realise that some of the most important things are not taught in our schools. Money is one topic that is hardly given any attention and we graduate into adulthood without knowing a lot of things about money and how to manage it.
Not just schools’, conversations around money and managing money does not figure in the dining table conversations. As a result, we develop bad money habits.
Due to the lack of awareness, many youngsters land up in severe debt and without adequate savings for their retirement to fulfill their other financial goals.
Having good financial habits goes a long way and helps you become financially independent.
Many young people don’t start saving as they believe that they don’t have enough money or they aren’t rich enough to save in the first place. However, our saving pattern and how much we save depends on how rich we ‘feel’ we are and not our bank balance.
Hence, instead of waiting to be ‘rich enough to save’, individuals should start saving a tiny portion of their salary every month.
Currently, there are many investment options where you can save or invest a small sum of money every month.
In the first point, we have talked about how saving depends on how rich we feel. Another way to jumpstart the process of saving is by taxing yourself.
Let us assume that the government has levied more taxes on your income. You would still find ways to do the things that you want. Now, instead of the government, assume that you are taxing yourself.
So, before you spend your salary, tax yourself a certain percentage of your income. It may be 5%, 10% or any other number that you are comfortable with. And make sure that you automate your ‘tax’ so that you pay your tax religiously without any fail.
We cannot predict the future. Emergencies can take place at any time. Hence, it is important to remain prepared for any impending emergency situations. According to a rule of thumb, an individual should have at least 3 months of expenses for emergencies. These emergencies can include a car breakdown, job loss, urgent house repairs etc.
Savings account and liquid funds are the two popular options to park money for emergencies. A savings account will give a fixed interest rate and is safer than a liquid fund. However, the ease of transaction of savings account may make it a little difficult to save for emergencies.
A separate savings account will help you to save for your emergencies. You can easily set up an online mandate to transfer a specific sum of money from your salary account to the other savings account. Remember, to keep the debit card of the emergency savings account at home while you go shopping.
Blindly investing may not help much in your financial journey. Financial goals act as an anchor in investing. Knowing your financial goals will help you to invest in the right investing option. Short term goals and long term goals require different investment options.
It will also save you for falling from common biases that are prevalent among investors.
A budget is mandatory for proper management of money. A budget needs to be followed religiously. However, budgeting is not about keeping a track of all the expenses.
To properly budget, you can segregate your income into three broad categories: needs, wants and saving/investing. According to the rule of thumb, around 50% of your income should be earmarked for essential expenses, 30% towards your wants and at least 20% of your income should be saved or invested.
The essential expenses include rent, electricity, food and utility bills etc, while wants include movies and eating out. The third component of savings and investing include the money invested for your financial loans.
There are different saving and investing options available for individual options. Fixed deposits, recurring deposits, equities, mutual funds, NPS, PPF and gold are some of the common options. Some of the investing options such as ELSS, PPF and NPS also help to save tax.
These investment options fall under different asset classes and come with different features. Hence, it is important to know the various features before investing.
Investing comes with their share of risk. Diversifying your portfolio among different asset classes and investment option helps to reduce the risk. Diversification should be done in a planned way keeping your age and financial goals in mind.
Term insurance is a type of life insurance that protects your life. The objective of term insurance is to provide monetary compensation to your family after your death. Term insurance is the cheapest way to secure your life. As the premium paid against your life cover remains the same throughout the tenure, the earlier you take term insurance, the lower will be your premium.
However, in the case of term insurance, the policy cover is only paid at the death of the insured person.
Retirement may sound like aeons away. The earlier you start, the easier it will be to accumulate a handsome retirement corpus. Plus, the power of compounding will work in your favour as you have a longer time span to plan for your retirement.
Being 30 marks the start of a new phase in your life. It is during this time that you maybe promoted to a leadership position in your company; your business may start to expand and become profitable as well, and you may get married and start your own family. In short, being 30 means that you have become a full-fledged adult.
Being an adult is not easy and one has to take a fair share of financial responsibilities. Before you come face to face with the various financial responsibilities, having good financial habits will help you to keep some of the financial problems at bay and attain financial independence as well.
Tags: money lessons, money, before 30
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