The early 20s, an age of transformation and exploration, is accompanied with a newfound independence as well as a plethora of responsibilities. Individuals, in their early 20s, experience a sense of financial independence after receiving their first pay cheque.
However, to be financially independent, one must not only earn money but also learn to spend, save and invest it prudently. Saving diligently and investing wisely in early 20s helps in leveraging compounding and laying the foundation for a financially secured future. In addition, taking control of finances helps to deal with financial crises without falling into a debt trap.
However, managing finances in early 20s might seem difficult and daunting since one has to pay off fixed expenses with setting aside money for unanticipated circumstances within a limited income. Though, by adopting some financial principles, one can not only learn to manage expenses within a tight budget but can also strategically invest income to make extra money. Here are some core financial principles that can contribute to your long-term financial well-being:
Incorporate budgeting and early saving in your financial strategy
To manage finances tactically, one must start with a realistic budget and adhere to it with unwavering dedication. To ensure clarity about one’s financial situation, an objective budget must include income from all the resources along with prioritising fixed expenses such as rent, electricity, water bills etc. and prudently allocating money for voluntary expenses like travels, entertainment, self care activities etc.
However, in times of uncertainties, predicting the future is not feasible. Thus, a substantial amount of money must be saved to deal with future emergencies. It is advisable to cultivate the habit of saving early in life, as small contributions can grow into a substantial sum over time. Also, individuals can consider using tools like Systematic Investment Plans (SIPs) to automate their savings.
Create assets and minimise liabilities
Apart from budgeting and saving, strategic investment for asset creation and minimising debts are also necessary for financial security.
Investment in financial securities that generate consistent revenue and appreciate over time helps in the expansion of wealth. One of the integral aspects of asset allocation is effective diversification which ensures financial stability and optimal return even during market volatility. Also, to expand knowledge and earning opportunities, youngsters can tap into their network of friends, family, and acquaintances.
In addition to asset creation, youngsters can minimise liabilities by avoiding unnecessary expenses and paying off debts early for financial security. It has twofold benefits. Firstly, it reduces financial stress and secondly, it improves an individual’s credit score. With an improved credit score, one can take advantage of higher chances of loan approval and lower interest rates on loans in future.
Secure your future with an emergency fund
It is worth noting that financial success is determined by how much one saves, rather than how much one earns. Thus, for financial success and to deal with future financial crises, a substantial portion of one’s income must be allocated towards an emergency fund. This fund acts as an extra cushion of cash during unexpected situations like car damage, home renovation or medical emergencies. Also, individuals can consider purchasing term insurance to protect themselves and their loved ones in case of unfortunate events.
Invest in personal growth for financial success
To navigate and excel in the realm of finance, investing in personal growth is just as important as investing money. For instance, investing in financial literacy equips people with excellent finance management skills to not only maintain financial stability but also expand their money by investing effectively. It empowers individuals to make informed decisions in money-related matters such as managing debt, borrowing, intricacies of the financial market etc. and ensure long term financial well being.
Apart from financial literacy, one may focus on acquiring new skills, pursuing higher education, and participating in workshops and seminars for personal growth. It is crucial to recognize that knowledge is the greatest asset to earn the highest returns in the long run.
Managing finances is a learning process that involves a variety of challenges and successes. Taking control of finances in the early 20s prepares individuals for future uncertainties and instils financial resilience. Furthermore, it enables individuals to develop essential financial habits that guide them towards a more secure future financially as well. Through good financial management, individuals are able to gain financial stability, build essential habits, and become better prepared for financial uncertainties.
Mahesh Agarwal, National Head-Wealth Management, AUM Capital Market
