The 20s in our life is a phase where a lot of new things happen. You are most likely to move out of college and settle into a full time job in another city. While it is easy to get over whelmed and exploit your new found freedom and money, taking care of your finances will go a long way in making sure that your financial health is in the pink of health.
The late 20s are a bit different from the early 20s. While the early 20s is more about experimentation and travelling, late 20s calls for stability and focussing on important matters such as finances, career and other life goals. In case of personal finance, it is the stage where people look for investment options that can help them to earn higher returns and fulfil their financial goals.
However, before looking at the different investment options, one should have a savings account. A savings account is a must-have to save and invest through the various investment options. A savings account that gives a higher interest rate should be preferred as you can earn high returns on your savings account.
People in their 20s have just started to earn money or have been earning for a while. However, it is rare for an individual in their 20s to have a large sum amount to invest in any particular investment option. An easy way to start saving would be to a periodic investment, say, monthly. One of the best avenues that can help you save money on a monthly basis is recurring deposit. It is the simplest and easiest saving option for people in their late 20s.
The recurring account can be used to achieve short term financial goals such as planning for a foreign vacation, buying an electrical application of your wish, or planning for your dream wedding. Saving a certain sum of money every month will also help you to cultivate financial discipline and restrict over spending.
You can open a recurring account within minutes through your savings bank app or online. As your recurring deposit is linked to your savings account, amount towards your recurring deposits can be easily debited from your savings account and vice versa.
Another easy to start investing is to invest in mutual funds through the systematic investment plan(SIP). Equity mutual funds have the potential to generate higher returns in the long term. In the 20s, you have ample time on your hands to fulfil your long term goals which can be buying a house or car etc. Also, the impact of compounding also increases manifold if your mutual fund investments are held for a longer time.
With SIP, you can invest a certain amount every month. Moreover you don’t have to stick with the same monthly SIP month on month. You can increase your SIP amount on a regular basis as and when your salary increases. You can also invest your bonus amount in addition to the existing SIP. This will help you to reach your goals faster.
Just like in RD, the certain sum of money is automatically debited from your savings account when you set up an SIP.
In this stage, other than saving to fulfil your financial goals, marking a certain sum of money for emergencies is also equally important. Typically, one should have 3 to 6 months of expenses in their emergency fund. You can build your emergency corpus either through a recurring account or by investing a certain sum of money every month in a liquid mutual fund. Liquid fund is an ideal investment option to create an emergency fund. Liquid fund carries the lowest risk among the different categories of mutual fund. You can also keep a certain portion of your emergency corpus in your savings account. Experts advise that one third of the emergency corpus should be kept in a savings account while two thirds should be parked in a liquid fund.
In your 20s, you may feel that you need insurance. However, that is far from the truth. Although you may not have dependents, taking a term insurance before you hit 30 has many advantages. As you are young, you can get a higher life cover at lesser price than a person in their 30s or 40s. If you are a woman, non-smoker or non-drinker, the premium reduces further.
Paying life insurance premium every month or every year can seem like a waste of money as you don’t have any dependents right now. However, you should remember that the premium amount remains same throughout the term.
Once you are sorted with insurance, financial goals and creating an emergency fund, retirement should be the next thing on your mind. Retirement may seem distant but with proper retirement planning, you can retire early or retire with a handsome corpus at your disposal. While the previous generations had pension to fall back on, today’s generation don’t have that luxury. Hence, it has become imperative to start planning for retirement as soon as possible. One of the best investment options to plan for retirement is public provident fund (PPF).
PPF is a safe and secure way to plan for your retirement. It also gives an attractive interest rate of 8%(Q1 FY2019-20). Also, the returns are tax free. Investing in PPF can also help you to save tax. You can invest any amount between Rs.500 to Rs.1.5 lakhs in one financial year. It has a lock-in period of 15 years after which the account can be extended in batches of five years.
The late 20s primes you for your life after 30. If you sort out your financial life before 30, it can have many positive impacts in days to come.
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