Wealth creation is usually not on your priority list when you are in your twenties. More focus lies on career building, exploring new restaurants, enjoying party life and paying off the student debt etc.
The twenties are the time when you ‘make many mistakes and learn’. These could be financial mistakes also. The most common mistakes are spending beyond your means, living off your credit cards and not tracking your money. When you are in your twenties, living within a budget is no fun.
But it’s surely better than finding yourself in a financially stressed situation later in your life.
As you are in the early days of your career, you may think your income would not be sufficient to save for the long future. You have debts to pay off and you need to take care of living expenses which would leave you with little money to save.
But, do you know the twenties are the perfect time for you to build wealth? Because you have time by your side.
Time has all the power to grow money. No matter how little you save, you can build a significant corpus for the long-term when you start investing it in your twenties.
Saving in your twenties inculcates the disciplined saving habit in you which sets your finances on track for the future years. Time helps your money grow with compounding effects.
Before we move ahead to know how to get extraordinary in building wealth in your twenties, let’s first understand the common mistakes that millennials make during their young age.
Common mistakes that you make in the 20’s
1. Spend more on lifestyle upgrades
What most of us look up to in our twenties is keeping up with the people around us. We feel everyone else is having a good life, spending more on lifestyle.
Not creating a budget and spending plan is one of the biggest that you make in your twenties.
What to do?
Have a clear money budget for the month and track it properly. You can have a clear idea of your spending habits. This is how you will figure out where you can save. You can also use any money apps to keep a track of your spending as well!
2. Excessive use of credit cards
Credit cards surely provide financial flexibility and are a valuable tool if used wisely. In your twenties, you would prefer a credit card for every expense and shopping as it comes in handy, easy access to money.
Not using credit cards wisely and piling up debt due to this is one of the biggest mistakes that you make in your twenties.
Did you know? Credit cards have the highest ever interest for not paying on time!
What to do?
Limit your credit card usage to a maximum of 50% of your monthly income so that you can easily repay it on time.
3. Not having adequate insurance
When you are young and healthy, it is quite common to go without life insurance and health insurance coverage. Many millennials and Gen Z buy insurance only for the purpose of saving tax instead of understanding the product completely.
Not having adequate insurance coverage, both life and health insurance is one of the biggest mistakes that you make in your 20’s.
What to do?
It is important to know that any health emergencies can make a dent in your pocket and deplete your savings.
If you are financially responsible for anyone or plan to have a family in the recent future, opt for a life insurance plan immediately.
Not having adequate life insurance coverage can leave your family financially disturbed.
Book your Insurance Planning Appointment with Koppr today!
4. Starting a family without any financial plan
Many people get married and start a family without any proper financial plan, which is one of the major financial mistakes that they make in their early life.
Wedding, pregnancy and raising a child requires proper planning on a financial front.
What to do?
Download the Financial Planning Guide from Koppr today. If you have any queries, do feel free to reach out to us.
5. Not setting financial goals
Achieving any milestone in your life takes a lot of time and effort, which requires you to have a clear roadmap for the same.
Not identifying and setting up a financial goal may you leave clueless about your future. If you have to buy your dream car, home or for your later years of life, it is important to be focused today.
Not having a clear goal is a major mistake that you can make in your early earning life.
What to do ?
Plan your finances by choosing your Priority and Life Goals.
6. Not creating an emergency fund
Unforeseen emergencies can pop up anytime during your life. It could be any medical emergency or losing a job, etc. As soon as you start earning, it is important to set aside money for emergency purposes.
However, most people do not understand the importance of creating an emergency fund. This mistake of not creating an emergency fund can land you in debt traps and financial distress.
What to do?
Keep a minimum of 6 times your monthly expenses as your emergency fund.
It is a natural human tendency to get influenced by peers.
All you see at that age is people around you of the same age spending more money and focusing more on career and relationships.
If you want to become extraordinary and build wealth for your future, you need to choose your own path. All you need to have is a strong foundation to start building wealth when you are young.
You can be an extraordinary investor just with these four crucial steps.
Four Steps to Start Building Wealth Now
Step 1: Make risk your friend
Be it a career or your financial life, the twenties are the age to let yourself free to take some risks.
Some of you would have just started your career and are single or some of you would have just got married and started a family. As you would have little or no responsibility on your side, it’s a perfect time to take risks and explore what the world has to offer for you.
When it comes to your personal finance, investing in your twenties gives you the benefit of time and compounding which allows you to take risk as the downturn if any can be covered over the long term.
It would be ideal to allocate a significant amount of your savings towards high-risk and high-return potential investment products like equity mutual funds, stocks and exchange-traded funds etc. instead of investing in low-risk conventional investment options.
Let’s take examples to understand how taking a risk in your twenties helps you in building wealth over the years.
Let’s say you are investing INR 3,000 per month in a bank recurring deposit for 10 years. Let’s assume the recurring deposit offers you an interest rate of 5.5% p.a.
Your total investment into a recurring deposit account would be INR 3,60,000 over 10 years and you would be earning a total interest of INR. 1,20,000 on your investment.
That means the total value of your investment or the maturity amount of your recurring deposit would be INR 4,80,000.
Let’s say you are investing INR 3,000 per month in an equity mutual fund through a systematic investment plan route for the next 10 years.
That means, your total investment would be INR 3,60,000 over 10 years. Let’s assume, with many market cycles equity funds deliver a return of 12% CAGR, you would be earning a total of INR 3,37,017.
That means, your total earnings would stand at INR 6,97,017.
Let’s say you continue to invest in a systematic investment plan for 20 years, you would invest INR. 7,20,000 and your total investment value would be INR 29, 97,444 at the end of 20 years assuming the fund continues to deliver the same rate of return.
Step 2: Invest for a long haul
When you are in your twenties, your goals may not be very clear to you. You may be sure about certain goals such as buying an expensive car when you are thirty or you are sure to go on a luxury trip in the next five years.
Certain long-term goals like when would you exactly need money for your children’s higher education (especially when you are single or newly married), when would you want to retire, etc.
Millennials today may also be facing uncertainty in the job market. However, this should not stop your habit of investing.
The best way to invest in your twenties is to invest for the long haul, which is for your goals that are decades ahead.
In this investment strategy, you may miss out on excessive gains, but you would be able to earn modest gains without being affected by any short-term fluctuations in the market.
It is important to understand that the market always fluctuates between good and bad. When you constantly track the market and accordingly buy/sell, then you are most likely to be hit badly by the market downturn.
If you are investing for the long haul, you will be able to ride out a down market more effectively. This does not mean; you should invest and forget for decades.
Constant review and pruning your portfolio is also important alongside keeping your long haul investing strategy.
For example, you have invested in a stock that was doing good and had good potential for the future. But fundamentals of some stocks can turn out to be weak. Irrespective of the market condition, it is important to get out of such stocks and revise your portfolio.
However, while you are investing it is important to choose the right type of stock, mutual fund or any investment product with a thorough understanding of the specific investment option.
You can do your own research or seek expert advice while investing.
Step 3: Learn to live within your means
To successfully live within your means of attaining financial freedom, you need to have financially responsible behavior.
To start with, you must know what your means are. You need to understand the income flow and then list out your expenses, both fixed and variable expenses. This means you need to create a clear budget and spending plan.
You need to also effectively follow your plan and stick to it. To grow serious wealth, you need to resist the urge to spend more and learn to live within your means. Do not blow your income on lifestyle upgrades.
You can choose a 50-20-30 plan for your monthly budget. This means, 50% for your fixed expenses such as house rent, grocery and other essentials and utility bills, etc.
Keep 20% of your income for variable expenses which could be for shopping online, entertainment and dining, etc. The remaining 30% of your income must be strictly utilized for savings and investments.
Adhering to this budget plan can help you save significant money and build wealth over the long run.
Here are few good practices for you to live within your means:
1) Use a credit card wisely
A credit card is the most convenient form of interest-free credit available. If you use it wisely, you can enjoy its benefits without getting trapped in debt.
Do not rely on a credit card for all your living expenses and use it whenever it is necessary and beneficial.
Time your credit card purchases and pay your bills well within the due date.
Know a host of discounts, rewards and cashback available for your credit card to take the benefit whenever possible.
Using a credit card wisely and managing the repayment well can help you live a financially peaceful life.
2) Resist yourself from spending on materialistic things
Spending too much on expensive materialistic things early in your life holds you back from becoming a wealthy person in your 30’s or 40’s. Hence resist the urge to spend on expensive things.
For example, purchasing an expensive bike might be first on your list as soon as you start earning. Instead of going with the urge, if you wait and save for the same to buy after some years would be a financially great move.
3) Set aside an emergency fund
Setting aside money for emergencies will create an emergency fund. With this, in any unforeseen circumstances, your budget is not disturbed and the savings are not depleted.
This emergency money will allow you to pay your emergency health bills or help you live for a few months in case you lose a job, without hampering your existing savings and the monthly budget.
4) Boost your income
If you aim towards wealth creation and becoming rich, you need to focus on the opportunities to boost your income which will help you save more.
Better paying career opportunities, passive income-earning opportunities and focus more on the professional skills that can earn you extra money.
Having multiple streams of income can help you maximize your savings. There are various opportunities out there to boost your income. You just need to explore them.
5) Get your budget on track
Getting your budget on track helps you hold back yourself from overspending. Having a far-sighted vision and long-term approach is what you need to have in your twenties to have control over your spending urges.
Debt management plays an important role in your financial planning. When you have debts to pay off, concentrate first on high-interest debts. Let debt payment be part of your budget.
Step 4: Learn about financial planning
Financial planning differs from one person to another, depending on their annual income, expenses, risk-taking ability, return expectation, financial goals and financial obligations, etc. the first job is always special.
The thrill of newly attained financial freedom, weekends with friends, dining, partying and managing everything in a new city gives you no time for financial planning in your twenties.
Many may even feel setting aside money and saving for the future is tough. Some may think it is too early to save. But the fact is that the twenties are the best time to save.
And, financial planning must start as soon as you start earning. You miss out on the ‘time and compounding’ advantage that you get for early life savings. Also, keep yourself updated with Financial News by downloading the Koppr App.
For example, let’s assume you are 23 and you think you cannot save money with only INR 1,000 left after all the expenses.
Now, let’s see how much that INR 1,000 if invested monthly can benefit you over the long term. Let’s assume you are investing INR 1,000 monthly into an equity mutual fund via a systematic investment plan route.
If you continue this investing till you reach 50 years of age, you would invest a total of INR 3,24,000.
If the fund gives you an average return of 12% CAGR, your investment would value around INR 24,37,000. Isn’t that a good corpus? such is the magic of time!
That means to create wealth over the long run, all you need to do is invest regularly (irrespective of how small or big the amount is) and smartly in the right type of investment option.
To do so, you need to have basic personal finance and financial planning knowledge for long-term investment success.
Having a basic idea of investment options, the importance of financial planning and how different investment products work help you in making a smart and an informed investment choice.
It is also important to continually upgrade your financial knowledge. That does not mean you need to obtain a degree in financial planning.
You can just take a quick online course of Koppr on early financial planning to boost your financial literacy. Instead of spending on lifestyle upgrade, spend on continual mind upgrade by learning new things.
There are no foolproof methods or steps for becoming wealthy.
However, realizing the importance of savings, proper financial planning and having a solid plan of action for your financial future can ensure the best start in your twenties to become wealthy in future.