You have recently graduated from college and bagged a job at a dream company. Planning for retirement at this juncture of life might seem like a distant concern and clearing your debts may feel like a mammoth task. The last thing most 20-somethings want to think about is money. But the harsh truth is that time doesn’t pause and your 20s is the decade to take hard-hitting decisions that shape the rest of your life. Shutting your eyes to personal finance management when you are just starting out can severely restrict your choices later on. Thus, the truth remains that the time to start getting your personal finances in order is now – even if you are an underpaid employee and half your luxuries are sponsored by your parents. Your older self will be grateful to you for taking these measures.
Your credit history plays an important role when it comes to determining whether or not you are eligible for high-value financial transactions in the near future like vehicle loans, student loans, personal loan, or home loans. A higher credit score increases a lender’s confidence in timely repayments. This, in turn, will help you become eligible for lower interest rates and fees on loans. So, checking and maintaining a good credit score by monitoring your credit utilization ratio, reviewing your CIBIL report, taking one loan at a time, and avoiding late payments are of utmost importance. Bear in mind that when you are in your 20s, you are shaping your credit history and the length of your history is considered by your credit score. So, if you take timely action, stay accountable, and maintain good financial habits, you can boost your credit score over time.
Your 20s are the period when you are most likely to have a few debts – be it a student loan or credit card outstanding. Get all those auto, student, and other high-interest loans paid off. Ensure that once you have directed a stipulated amount towards long-term investment plans and emergency funds, the rest of your savings go towards clearing your debt. If you have multiple loans, divert your surplus income towards the payment of debt charging you the highest interest. This way, you can get rid of a high-priority loan soon and yet make minimum repayments towards other loans. In no time, you will have a list of debts being paid off rapidly.
This is an excellent time to gauge how much is ‘surplus’ in your budget, now that you may have hopefully been able to keep up or outdo the growth of expenses (best case scenario). You may have existing short-term investment plans keeping your wallet tight. However, as your income increases or you find another revenue source eventually, there may be more money that can be invested, which would otherwise stay in the savings account, luring you to spend it. At the end of each month, if you think your expenses are reasonable and there is a reasonable sum left in your savings account, consider that as your additional surplus, and direct it towards a safe investment option.
Ask any finance expert and the first thing they would ask you to invest in is health, life, and disability insurance policies. No matter whether you are in your 20s, 30s, or 50s, unpleasant circumstances come uninvited and with maximum force. Having disability insurance will provide risk coverage for lost income due to temporary or permanent disability (including chronic illness and serious injuries). Similarly, a health policy will offer coverage for medical expenses such as hospitalization costs, doctor consultation fees, or the cost of medicines. And lastly, set up life insurance that provides coverage for a fixed tenure – i.e. the term of the policy. A reliable finance expert or wealth manager will guide and help you compare multiple insurers to choose the best policies with maximum coverage.
Most of you may think that your 20s are far too early for you to plan how you want to spend your retirement. However, finance experts recommend that the sooner you start planning for your retirement, the better life you are able to lead later. The first step to take is to get comfortable with retirement calculators and analyze when you can retire comfortably. If you are able to figure that out without feeling overwhelmed, great. If not, either increase your income or cut down on expenses to boost your retirement funds. Any investment option that is low cost, tax-saving, and diversified, is perfect. Once you have exhausted your tax-saving investment options, go for low cost index mutual funds. And no, it’s not too early – it’s the right time!
Education loan. Credit card debt. New job. The 20s can be a bumpy road to hone personal finance management and money-related decision-making, but it’s also the perfect time to create a long-term plan. You don’t need to know everything – but the basics will provide a solid foundation. Take action with our essential personal finance checklist to aid your journey to financial health. In case you are confused and need help in framing financial goals, fret not. Get help from a finance expert at Dezerv!