As a millennial or Gen Z, you have grown up in a fast-changing world with endless possibilities. While the dreams and aspirations of a millennial might vary from a Gen Z, there is a common bond that ties both generations together. It is the quest for financial independence or a life without financial worries.
You might want a life where money worries do not tie you down, and you can call the shots and make your dreams come true. To help you have the best life, we will share some important pointers that can help you nudge towards the right direction.
Invest in yourself: Before entering the world of money and investments, invest in yourself. In this fast-changing world, investing in yourself is a must. Investing in yourself by continuously developing your existing skills and gaining new skills can help you increase your earning potential. You can consider pursuing certifications, degrees and attending workshops, seminars and networking events.
Live within your means: Unlike previous generations, millennials and Gen Z have a hard time living within their means. However, if you want to be financially free, avoiding overspending and bad debt is important. Learning to resist the urge to spend mindlessly on online shopping sites and malls and to keep up with the material possessions of your neighbours and colleagues is key to achieving financial independence.
Moreover, keeping lifestyle inflation to a minimum is essential. Lifestyle inflation is nothing but the increase in lifestyle-related expenses due to the rise in income.
Set your financial goals: To be financially independent, figuring out what financial independence means for you is important. You can do that by setting your financial goals, such as paying off debt, saving for a down payment on a house, or building an emergency fund.
Make a realistic budget and stick to it: How often have you made a budget only to discard it after the first month? We all have been there; many millennials and gen Z still struggle to make a budget and stick to it.
Having a budget is important as it will give you a bird’s eye view of expenses, investments and income.
You can look at the 50-30-20 budgeting rule. As per this thumb rule, you allot 50% of your total income for your needs, 30% for your wants and 20% for investments. You can customise this budgeting rule at your convenience. If you are a Gen Z who recently started working, you might have to spend more than 50% on your needs, such as rent and utility bills. The key is understanding your current situation and making a budget that works for you.
Build an emergency fund: Life is full of surprises. It is impossible to be financially independent if you don’t have an emergency fund to help you bounce back after unexpected situations such as hospitalisation or a job loss.
The amount of money that you need to keep in your emergency fund will depend on your current financial situation, such as liabilities and work profile. If you have higher liabilities, dependent children and work in a highly volatile sector, you might have an emergency fund with at least six to one year’s worth of your expenses. On the other hand, if you don’t have liabilities, you can start by building an emergency fund for three months.
Look to clear bad debt: If you have bad debt, such as credit card debt or personal loans, you might want to clear it as soon as possible. It is because credit cards and personal loans have a high-interest rate and other charges. Even if you are effectively managing your finances by adhering to a budget, utilising money wisely, and consistently saving, the presence of high-interest-rate debt can impose a significant constraint on your capacity to save and invest. Over time, this debt can gradually erode your income, undermining your potential for accumulating savings and making fruitful investments.
You can start by paying off lower loans and gradually moving to high-interest loans. This will motivate you to continue working towards clearing bad debt.
Have adequate insurance: The next step would be to have adequate insurance coverage. Term insurance and health insurance are two important insurance policies. Term insurance is a type of life insurance that covers your life and makes sure that your dependents live a dignified life after your untimely demise. Health insurance is essential as it can help you save money on hospitalisation costs and other related expenses. Given the escalating costs of medical care, having an adequate insurance policy is of utmost importance.
Start investing: Different investment options include stocks, bonds, mutual funds and real estate. Each investment option has its features, such as risks and potential returns. So, it is important to research the different investment options before investing.
It is also important to start investing as early as possible to take advantage of the benefits of compounding. The longer you invest, the higher the impact of compounding will be. Even if you start investing a small amount of money consistently, you might accumulate a higher amount than someone who started investing later with a higher amount of money.
For instance, if you invest ₹ 5000 every month in an equity fund for 30 years, you will accumulate ₹ 1.75 crores. While the other investor, who invested ₹ 10,000 for 20 years, will accumulate ₹ 99 lakhs. In both cases, we are assuming a CAGR of 12%. This is the power of investing early.
With independence day around the corner, it is also an opportune time for millennials and Gen Z to look at their finances and create a roadmap for financial independence.
Padmaja Choudhury is a freelance financial content writer. With around six years of total experience, mutual funds and personal finance are her focus areas.