Financial planning: Want a smooth retirement? Start saving from a young age

Unless you have an income matching that of Kim Kardashian, there is no reason why you shouldn’t save. Particularly, when you are in your 20s, just into your first or second job, remember the money you save is the money you earn. While salaries are considered active, you may interpret saving as a semi-passive income.

It’s a fact, when you have a purse-load of cash and lesser responsibilities, the thrill of buying the good things in life is unmatched. Most jobs come with a disclaimer of no retiral benefits and you won’t be having the luxury life all through. The moment you think of bigger investments like buying a home, a car or even starting a family, ensure you don’t struggle to make ends meet.

In this financial guide, we speak to experts to understand how you should plan investing in your early 20s to make sure you retire in peace.

Control your spending

“Most young people living in metro cities cannot control their expenses,” says Rajesh Vittal, a SEBI-registered financial advisor based in Bengaluru.

“They generally take numerous credit cards the moment banks offer them ‘lifetime free’ cards. They start living on debts. There are a lot of terms and conditions that are often not read by the customer and the banks purposefully keep them concealed. Besides, investment should be a priority the moment the salary gets credited. Pay your bills. Invest at least 10% to 25% of your salary. Then start spending,”

Start with the basic

“Don’t go out to invest in the stock market unless you know at least the basics of investing. Don’t depend on advisors. At the end of the day, it’s your money,” says Snighdha Menon, an investment banker and author of ‘Make Money Bloom in Autumn’.

Start as basic as a PPF account (which you cannot withdraw before 15 years) and some regular FDs in a short duration period (six months to less than a year and reinvest the same), she says.

“You are doing two things. First, locking up your money for 15 years and with the second, you are keeping money almost in hand but making it grow. This way, you build a good rapport with your bank as they start noticing. This might help you if you go for a loan later,” Menon says.

Plan your goals

The next step would be to plan your goals distinctly, says Menon. “Buying an expensive watch doesn’t count, though. Jot down the big goals you want to achieve. There will be two kinds of goals. One would be home, car, upskilling and so on. The other one would be dreams like buying yourself a luxurious trip or gifting your parents a vacation in Europe.”

“Also keep in mind, life is not till your 40s. Post that, you would have responsibilities, which need to be included in the goals. And the flagship goal is how much money you think you should have when you turn 60. Once you have all written down, now put a date and amount of money you would need. Now start thinking how much you can save for each of these,” adds Menon.

E for Emergency

When you start thinking of finance, you realise there are just too many things that should be proactively planned. Have you built an emergency kitty yet? There might be health issues in the family or a job loss or even a salary-cut.

Ideally, you should have at least the money you spend over six months plus Rs 2 lakh overhead for emergency hospitalisation, if needed.

Put this money in a liquid fund or overnight fund. These are mutual fund investments, which can be withdrawn instantly though the returns are low. Besides, you can also keep this kitty at a bank account that would hardly be used for regular transactions.

Insurance goals

“Even if your workplace provides health insurance, we have seen how Covid created a mayhem. Buy health insurance that has maximum restore options and that covers hospitalisation for the same disease numerous times a year,” says Vittal.

Next comes life insurance. Life insurances are an amazing tool to secure your future, some of which also offer good returns after a certain age. Now insurances are for insurance and not for investments. If you have your spouse or kids or family member dependent on you, buy a life insurance that offers a regular pension if there is an untimely demise of the insurer.

Systematic Investment

As they say, mutual funds are subject to market risks, consider SIP through mutual funds. Once you have everything above ready, start investment.

Being young and having a good buffer to save you, be as aggressive as possible till 35 years of age. Again, mutual funds should be goal-oriented. So, for your dream trip to Greece, invest in a fund that is predicted to earn the desired amount in that time-window. Go for funds that are sector specific or the ones that invest internationally. This would help you get a taste of stock markets. After a year, you can see if those are actually growing.

What about stock market investment?

As they say, if you don’t earn when you sleep, you will not grow rich.

But don’t get too inspired by Scam 1992 web series. If you know stock markets function inside out, great. If not, try to dip your toe first.

“Pick up shares of some well-known companies, which you have seen perform well or you think have a good future. For first-time investors, have long-term goals. Like say 10 years or 15 years, which even if market crashes wouldn’t harm. Also, don’t overlook the earlier investment plans,” suggests Menon.

Now that you have a great portfolio built, you can aim for the stars. Remember, these are just for the 20s and once you are in your 30s, your investment and goals will differ.

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