Personal finance, despite its importance, is yet to be taught as a subject
in high school or colleges
in our country.
Hence, most youngsters, when they join their rest job or embark on a professional career are fairly clueless about how to manage their money. If you are one of them and believe
that understanding personal finance is far above your head, let me say; you are wrong. All it takes to start treading on the correct path to financial
security, is the willingness to create wealth and a little reading.
Trust me; you don’t need to be outstanding in maths. Knowledge of the available
financial products and their suitability to an individual’s goals is all that one should be concerned about.
To start with your financial planning, take a look at the six most important things to understand about money management that will help you lead a prosperous and comfortable
life.
Understanding savings, investment, Insurance
Make no mistake; insurance is covering you financially for probable future risks, whereas an investment is a commitment of money for purchasing financial instruments to gain pro›table
returns in the form of income,
interest or value appreciation of the instrument itself. There’s no pro›t angle involved in
insurance.
Risk management mitigates ›financial losses as and when they arise. A comprehensive risk management strategy would involve personal, and property risks. The earlier you adopt a risk management system, the better for you. Personal risks include probable loss of income because of
Risk management mitigates financial losses as and when they arise. A comprehensive risk management strategy would involve personal, and property risks. The earlier you adopt a risk management system, the better for you. Personal risks include probable loss of income because of
poor health,
injury, unemployment, death, etc. Property
risks include loss of assets
due to ›re, earthquakes, and other
uncontrollable events.
The best way of managing ›financial risks is by purchasing an insurance
policy. Insurance will protect you from unexpected ›financial losses, compensating according to your contractual obligation with the insurer. Avoidance is another common
way to mitigate
risks. Many risks
and their consequences are often unavoidable in life and may cost a fortune. For instance,
subscribing to a health insurance policy will help you avoid expensive medical treatments in case of hospitalization. For ex: an annual premium of about Rs. 4,500 can get you a cover of Rs. 3 lakhs. You can similarly insure the assets you have purchased like the car or your house.
It’s recommended to have your own health insurance policy,
even though your employer is
providing you group health
cover.
Now that you have your risks covered, it’s time to setup an exigency
fund. A contingency or exigency
fund acts as a
financial cushion during unforeseen emergencies like job loss, illness, family crisis etc. It helps you to avoid digging into other funds. Such a fund should ideally
cover at least 3 to 6
months expenses.
Remember the following
about contingency fund:
It should be liquid, like a savings bank account, Fixed Deposit,
Liquid Funds.
Develop your skills: Enhancing your technical as well as your interpersonal skills will only add on to your career
growth and helps bring you to an expert level. Many people ›nd satisfaction in following their passion, rather than professional quali›cation. Learn another
language, or better
your skill sets related
to your passion,
to add value to
yourself.
Health is wealth: Young adults, having landed a job, begin ignoring their health. But what worth is the money, if you have no health to enjoy it? If you have been neglecting your health because of erratic
work hours, and no exercise
due to lack of time, you should start looking after yourself
immediately.
Building relationships: Youth today spend more time with electronic gadgets than with people.
Relationships are much like emergency funds. The more you invest, the more you have during an exigency.
Try spending more
time with your family/friends and also, acquaint with new people.
Before investing any of your savings,
determine why exactly
you are investing. Grab a paper
and list all the things you want to do in life, focusing
on the big moments
that comes with a hefty price tag. Assign time frames to organize your future plans. Maybe ›ve years
down the line, you want to get married,
have a child and buy your REST house. Ten years out, maybe you want to buy a car or a bigger house. Twenty years from today, higher education expenses for your child would begin. And then what about retirement?
It seems the future obligations are adding up quickly.
But don’t get discouraged. Because that’s why you are investing. Try to be specif about your future plans; even if they are far o漀.
Retirement is the best example here. The amount to be saved substantially depends on when you plan to retire.
If you want to retire
early—perhaps in your 50s—you must set aside more from your salary to save enough for the remaining 25 or 30 years of your work life. But if you want to work till 65 or 70, you may invest significantly less. Also,
retirement plans are not equal for all. The amount you need to save for your retirement corpus will depend on many factors like your life expectancy, lifestyle, etc. It’s time to get familiar
with the various investment instruments
Having set your goals, it’s now time to invest. Start doing an SIP is the mantra, the moment you get your ›rst salary
is when you should start your ›rst SIP.
Systematic investment plans (SIPs) are one of the best instruments for wealth creation
for young adults. SIPs work on the principle
of regular and disciplined investments. It’s like a recurring
deposit where you contribute a small amount every month. SIPs allow investing in mutual funds (MFs) through
smaller periodic investments (monthly in most cases),
rather than a one- time lumpsum
investment. That means you can pay 12 periodic
investments of Rs. 700 each, instead of a single investment of Rs. 8,400. Besides, you can invest via SIPs without
any impact on your other ›nancial
liabilities. It’s important to understand the power of compounding and rupee-cost averaging to appreciate SIPs better. You can take the
SIP route to invest directly in equities as well.
SIPs have brought MFs within the average Indian’s reach, and it makes more sense when you start early. Even Rs. 500 is
enough to start an SIP.
Small investments through SIP are unlikely to be appealing. But it enables people to get into a habit of savings.
And over the years,
it can yield handsome
returns. A monthly
SIP of Rs. 1,000 at 9%, would grow to Rs. 6.69 lakhs in 10 years, Rs. 17.83 lakhs in 30 years, and Rs. 44.20 lakhs in
40 years.
Even for cash rich individuals, SIPs reduce the risk of badly timed investments and losing sleep over bad decisions. But the real bene›ts
of SIPs can be realized by investing early
and at lower levels.
Final words
Getting into the financial discipline is the most important
thing for young adults. Most youth in their rest job, spend their earnings
on things that give them instant gratification, largely because they taste financial independence for the rest time in their life. But saving
for the future, and providing for emergencies, should also be prioritized, because financial planning is all about planning
for a CERTAIN
TODAY as well as a UNCERTAIN
TOMORROW.