When you’re in your 20s, saving and investing money is probably the last thing on your mind. First job, first salary, and financial freedom can be overwhelming. We all wish to be carefree and enjoy our salary by taking a vacation, going on a shopping spree, partying, etc. It’s not wrong to have fun and enjoy. However, you should not let these things get ahead of you.
Investing in your 20s is as important as enjoying it. It will help you achieve stability in life later on. To elaborate, when you start investing early, you can create a larger corpus for yourself for retirement with time on your side.
It is a common excuse that we aren’t earning enough to save for the future. But, you can start investing with as little as INR 500. Investing in small amounts and increasing them gradually will help you create a large corpus over time. Small drops make an ocean; this is a perfect example of saving small amounts
regularly to create a large corpus in the long term.
Here are some quick tips for choosing your investments:
Know the Basics of Personal Financial Planning
The education system doesn’t cater to budgeting, investing and managing finances at a personal level. Thus, you need to learn the basics of personal financial planning. Financial planning involves creating a road map for yourself for financial well-being.
Here you need to start categorizing your income and expenses, budgeting them, and allocating some of your income towards investments or savings. Explore the various types of investment products available and analyze their suitability for your goals. As you begin to earn a regular income, you must also wisely plan your taxes. Therefore, try to learn, plan and organize your finances in the best way possible.
Take Advantage of Your Youth
When you’re young, your biggest advantage is the number of years you have left to grow your cash. Compound your money like never before by starting small now and watching your cash reserves widen in the future.
Let’s understand the impact of starting investments early with an example.
Ms Usha and Ms Chitra join their first job at the age of 22. Usha started her investment journey right from the beginning. While Chitra didn’t start until she was 30 years old. Both of them plan to save for their retirement by investing in mutual funds. Usha starts her SIPs with INR 5,000 per month and gradually increases by 10% every year (step-up). On the other hand, Chitra also starts investing INR 5,000 per month, but 8 years later.
|Investment Duration||38 Years||30 Years|
|Monthly SIP Amount||₹5,000||₹5,000|
|Annual Step-Up Percentage||10%||10%|
Starting her investments early, Usha accumulated almost INR 13 crore by the age of 60. While Chitra’s corpus is about INR 1.7 crore. With a delay of 8 years, Chitra’s corpus fell short by almost INR 11.5 crore. The difference is quite significant, and now you can see the impact of investment duration on the returns.
Hence you must start investing as early as possible. Investing in small amounts regularly and gradually increasing the contributions will help you create a significant corpus by the end of your investment tenure.
Set Financial Goals
From the above example, it is quite evident that with time on your side, you can achieve your goals effortlessly. Thus, you should concentrate on creating your financial goals and investing in them. When investing in your financial goals, you must address the most necessary ones first.
For example, setting up an emergency fund and having insurance for yourself and your family. An emergency fund will help you in times of unforeseen events.
This fund comes in handy to sponsor your expenses without taking a loan or borrowing money from someone. Ideally, the emergency fund must be able to finance your expenses for up to 6 to 12 months. Or, it should be worth 3 to 6 months of your salary.
Once you have insurance and your emergency fund is ready, you must concentrate on your financial goals. Financial goals can be anything ranging from buying a house, buying a car, taking a vacation with your family, or sponsoring your child’s education etc. Whatever the goal may be, and you need to invest regularly.
How Much to Invest?
Upon identifying your goals, you need to figure out how much to save towards the goal. The thumb rule for investing is to spend 50% of your income on your needs. 30% of your income should be allocated towards your wants and the remaining 20% towards your savings and investments. Thus, you need to allocate your income towards your financial goals strategically. Depending on the investment tenure, you can allocate funds to the goals.
Where to Invest?
With a wide range of investment products available at your disposal, selecting the right asset class for your investments is quite overwhelming. If most of your goals are long-term, you can consider taking some risks with them.
Equity investments are ideal for long-term goals since they have the potential to generate a significant corpus. However, it is important to note that equity investments are risky compared to other debt and fixed-income assets.
If you do not have the knowledge or expertise to identify and manage your investments, you can consult a financial advisor to help you figure out your financial goals and investment plan.
Diversify Your Investments
Investing in one asset, one stock, or one fund may not be the ideal strategy for wealth creation. You should always consider diversifying your funds across different asset classes. Each asset class has a unique investment objective and risk-reward combination.
Over-exposure to one asset may lead to a high-risk portfolio. Therefore, you must carefully allocate funds across different asset classes to average the portfolio risk. Diversifying investments is a strategy that will help you maximize growth while managing risks.
Don’t Fear Volatility
Timing the market is not everyone’s cup of tea, nor is it ideal. Markets are always volatile, but that does not mean you postpone your investments. Trying to time the market is not what you should aim for. You need to have a strategy to invest across all market cycles. This way, you will be able to manage volatility better.
When investing for the long-term, you need not worry about short-term market fluctuations. Markets always move in cycles; therefore, even if the market crashes, it will bounce back in no time. Since you have a long-term investment tenure, you need not worry about these short-term corrections.
Review and Re-balance
Once you start investing, you must regularly review and re-balance your portfolio to stay ahead of the markets. In other words, some assets may no longer fit into your portfolio requirements.
Thus, you need to identify such outliers and replace them with what suits you best. Therefore, perform timely reviews and assess if the investment still aligns with your financial objectives. If not, you may have to rebalance the portfolio.
The entire process of investing and managing your investments can be daunting. Don’t let this feeling stop you from investing. Scripbox helps you define goals and invest in them.
When you invest through Scripbox, it automatically tracks your portfolio performance and suggests timely re-balancing strategies. Thus, don’t be overwhelmed by the complexity of investing; try to do it the smart way with Scripbox.