Life in the early 20s is a lot different from life in the late 20s. It is probably the most crucial decade in your life as it sets the base for the rest of your life.
These are the years of struggle, you are in your first job trying to figure out “is this it? is this what I want to do rest of my life?” or maybe thinking about changing the world, life-changing ideas, startups, dreams of traveling the world or working on your terms.
No matter what your goals and plans are, finance will be a factor among most of them. We all have gone through(or going through) this phase, where money in our bank account affects our life decision.
To avoid such situations, we need some principles around managing our finance.
Though finance is a very personal topic, it gets affected by your lifestyle, the opportunities you have, where you live, and so on. Irrespective of your current situations, you will find these ideas helpful.
Track your monthly expenses:
“If you can’t measure it, you can’t improve it.” — Peter Drucker
During our user interviews, we interacted with more than 500 people.
“We can’t save” was the answer to most of the questions during our interactions.
There are two ways to save:
- Spend less than you earn: you can save by bringing some behavioral changes and discipline.
Cut on outings, stop mindless shopping, cook your food, use public transportation, share a cab, and so on. - Earn more than you spend: If you can’t cut down on anything, work on your skills. Switch job, ask for a raise, train for in-demand skills, join a Bootcamp, or take online courses.
Track your expenses for a few months to know your average monthly budget, this step is necessary as no personal finance will work without capital(savings).
First thing first, pay your high-interest debts:
If you have any high-interest loans, start paying them off(or refinance them) as soon as possible.
Credit card debt is another big issue among young professionals.Warren Buffett and Mark Cuban both have warned against the danger of credit card debts.
A credit card can be useful in building a credit score but going into credit card debts is the biggest mistake you can make in your early twenties.
Emergency Funds:
If you don’t have any debt, you can start building an emergency fund. As the name suggests, this fund is for emergencies.
It can help you in the job transition period (you won’t have to take the first offer you get!), It can also help during medical emergencies.
Ideally, it should be equal to your six months of expenses (some consider one year a safe number).
This fund should be liquid so that you can utilize it in an emergency. You can park these funds in a high-interest saving account or a liquid fund(having a separate saving account helps a lot).
Insurance:
There are many misconceptions around insurance. First of all, insurance is not an investment. It is a financial instrument for managing risk.
If you own a vehicle, it is mandatory to get insurance for that as per law.
Apart from vehicle inusrance, you don’t need a ton of insurances: term insurance and health insurance are all you need.
Most employers provide or contribute to employee’s insurance. Check your employer’s policy on insurance before purchasing one.
Investments:
After building an emergency fund and getting insurances, you are almost ready for investments.
But before jumping into trading stocks, you should sit down and understand your risk profile. For example: If you want to retire early, investing all your money in one stock is probably not the best idea.
Before every investment, you should ask yourself these four questions:
- When do I need this money back?
- What are the risks associated with this investment?
- What are my other options?
- Am I okay with losing my capital (in case of high-risk investments)?
Building wealth and preserving wealth are two different skills.
The Stock market is a risky place to jump in without proper knowledge-a few bad trades, and you’ll end up losing all your hard-earned money in days.
You can start with low-risk investments like Fixed Deposits, Retirement Funds(PPF/ NPS), Index funds, Bonds.
The idea here is to start your investment journey, build the discipline(and beat inflation).
Before jumping to equity investments, learn the basics of the stock market. If possible, take help from an expert financial advisor.
The focus should be on building discipline, systems, investment principles — not on stock tips.
We’ll discuss more on stocks in the upcoming posts.
If I have to summarise this post in four steps, it would be Track, Save, Invest, and Diversify.
Hopefully, you have received some actionable advice from this post.
If you have any questions or want us to explain any topics, please reach out to us on Instagram or join our slack.
If you liked this post, you’ll probably also like my TEDx on “How to retire in your 30s?”
Thanks for reading,
Manish
