Your '20s are the age of realization. You're an adult and slowly start to understand the intricacies of the new responsibilities of your "mature" life. College was all about living in the moment and dancing the weekend away. But it is now that you understand that partying every weekend is not such a good idea both for your health and wallet.
You've crossed the first milestone of adult life - starting a job and gaining financial freedom. Get ready for your next milestone - investment. The '20s are the best time to start taking your own financial decisions, and begin to invest. Investing at this age is similar to studying a little bit every day. The results are always much better as compared to preparing for the entire syllabus a night before the exam or starting to save just before retirement.
This does not mean that you stop going out. It's all about maintaining a balance between your current finances and laying a foundation for your future savings to have the kind of lifestyle that you've been dreaming about for a long time. So, where and how should you invest? Here are some tips to get you started in the right direction.
1. Create a monthly budget
Budgeting, you're not new to this. It is highly possible that you have been hearing about budgeting your monthly expenses a lot lately. Still, we youngsters choose to ignore all the mature advice just because the whole process takes up time and effort or more often than not, we procrastinate till it’s already the end of the month.
This is usually a one-time thing followed by additional minor changes each month. Make a note, set a reminder; this will help you to build this practice into a habit. Budgeting provides you with an estimate of your monthly expenses and enables you to consider what you really need and what you might consider frivolous.
2. Start Saving a regular percentage of your post-taxed salary
Car, Europe trip or Burning Man – Every day you have a new goal getting added to your bucket list. Of course, these goals are time and age centric as well. Start saving gradually to achieve these present goals and then ramp up your savings as you age to fulfil future goals - house, marriage, retirement. This will allow you to fulfil your short term goals as well as save for your future dreams. It's considered good practice to save 30% of your after-tax salary.
3. Your Investments should be as per a broader financial plan
There is no point investing if you already have a lot of additional baggage. Do you have college debt still hovering over your financial plans? Do you always end up exceeding your credit card limit and are struggling to pay your monthly credit card bill?
'20s is the best time to check your spending habits and make changes wherever necessary. A fully loaded Europe trip will not be enjoyable if you're still drowning in debt. Your investments should take into account all these critical aspects. Do not do it just because your friends are doing.
4. Unleash the power of compound interest
Compound interest is all about time. To put it simply, it's not about HOW much you start saving but WHEN you start saving. Often interest is mistaken for debt, but here the interest is working in your favor. Consider your savings as a small snowball, compound interest is the force reckoning that snowball to gather more snow and grow into a huge snowball hurtling towards financial freedom.
So, if you wish to have a lump sum amount after a certain age, it is crucial to start saving now as the returns that you'll get considering you save today will be much higher regardless of the more significant amount you choose to save after 15 years.
5. Get a piece of the stock market action
This is the time to take risks; bank accounts are good for safety but can't keep up with the inflation. You have time, and you're in the age where you can take the risk of investing in riskier things that promise bigger rewards. Longer the time, less than risk.
6. Automate your investments
If you've reached this far then the chances are that you are highly motivated and want to start investing. Good! But motivation is a terms and conditions applied entity. What about tomorrow or weekend plans?
It is thus best to automate your investments. You can start simply by investing in mutual funds wherein each month a decided amount will be automatically cut from your bank account. Once you automate your investments, you will be clearer with your monthly expenditure and living on less. It's similar to your Netflix subscription, with one you're getting entertainment, and with the other, you're getting a secure future.
This article was authored by Ankita Barthwal