The young people in their early 20s – 30s with a ‘white-collared job/ profession is commonly referred to as Young Professionals. Do you belong to this bunch of young and ambitious youth?
Then you are likely to have just completed your studies and are filled with dreams and aspirations.
So what are you aiming at acquiring and possessing in life soon? Is it your first car or a home in your name? Or is marriage on the cards to fulfil your dream to start a family with your chosen one?
Or do you belong to that wise category of youngsters who are looking for know-how to gain insights into personal finance for working professionals before making any life-changing decisions?
Is managing your finance difficult?
It has been commonly observed that young professionals like you find it difficult to manage or consider the thought of managing their personal finances at the onset of their careers.
That is primarily because –
- You feel life has just started for you and you are too young to think of saving for the future as you have a lot of time at hand and can afford to think about financial planning and investments a few years later.
- Do you lack knowledge of personal finance that could include but not limited to how to go about it? What it is all about? When to start saving/ investing? What is the right amount to invest – is my earning too little to consider? What is the right time to begin? What is the right place to invest to optimise return? etc.
- You may be wondering who can guide you properly and not treat you as a ‘run-of-the-mill’ investor.
- It takes time for a youngster like you to understand the importance of managing expenses responsibly early in life; at times till you have undergone real-life exigencies yourself.
If you find any of the reasons even somewhat matching your current mental state, then take a deep breath and read on, as this article will not only guide you on how to go about with personal finance for working professionals like you but also make you mindful of money-mistakes to avoid; thus saving you from guilt and repentance in future.
A thumb rule to remember:
Irrespective of whether you are married or not, you should follow the 50:30:20 rule that says you must –
- Budget your living expenses within 50% of your monthly income at hand. ‘Living expenses’ can range from repayment of your education loan, rent to be paid in the city of your work if you had to relocate, your groceries and utility bills, medicine, local conveyance, insurance, etc.
- You must try and save/ invest 30% of your monthly income to live your financial dreams in future.
- 20% of your monthly income you can spend on your free will on partying with friends, dining out, buying gifts and accessories among other things for self and/ or loved ones.
This basic rule will ensure you have laid the foundation for your personal finance and move ahead with planning your investments to live your financial goals in life by following the steps detailed here.
A step-by-step guide to managing your Personal Finance for young professionals
Step #1: Identify your basic needs
In order to optimise your living expenses, you must understand your basic needs as listed below to ensure you and your loved ones are financially safe and free from untoward financial burdens in future.
This is the first step to effectively plan personal finance for working professionals.
Education loan –
If you had availed education loan to complete your higher education, then your first priority should be to set it off at the earliest.
This is because the interest paid on this loan is considerably high that can be fruitfully utilised to use to plan other investments towards wealth creation.
So other than the EMI debited from your account; whenever you get some extra income like incentives or performance bonuses, you must direct a major part of that money towards setting off your loan.
Same for your credit card bills and personal loans, if any. This is because you must remember that loans have never done good to anyone, but have eaten into your disposable income.
Health insurance –
Even before your start planning your finances, you must buy yourself health insurance coverage. Even if you are eligible for a medical insurance cover from the organisation you work for, still you must consider purchasing one on your own.
That is because the younger you are, you are expected to maintain the best of health; and the cheaper your insurance would cost.
If you are reading this article today, you are either a ‘Covid-Warrier’ or would have survived the wrath of the coronavirus pandemic and the exponential amount of job loss people suffered other than lives lost to the germ.
Thus there is no guarantee about anything in life as we have witnessed in the past eighteen months and more.
If you live in a Tier I city, then the minimum health cover* should be INR 5 lakhs.
In case your parents do not have their health insurance in place, you may want to consider a family floater of the same amount.
However, if you are married, your ideal health insurance family floater should be INR 10 lakhs, which you should increase with top-ups with passing years.
Term life insurance –
The biggest ‘IF’ is built in the word ‘LIFE’ alone. To protect your family in the face of financial exigency resulting from any untoward incident; like disease, disability or death; it is strongly advised that you buy a term life insurance of at about 22 times of your annual compensation (as approved and recommended by IRDA for your age group).
Given that you are in your 20s, a 50 lakh term cover would not cost you more than INR 6000 per annum – a cost of less than INR 16 a day. (source online applications on policybazaar.com)
Step #2: Budget your finances:
Though it may apparently seem that living on a budget is mundane, it will actually help you live life king size by optimally utilising your disposable income the way you want to.
Wondering how to budget? Just make an excel sheet with a detailed list of the monthly inflow of income and expenditures. That will help you allocate and reallocate expenditures and/ or cut down unnecessary expenses as well.
The 50:30:20 guideline will come in handy in this exercise.
In case you feel you are someone who fails to restrict your temptation to withdraw and overspend money; you may want to look at siphoning out a certain specified amount of money from your salary account to another account via an auto-debit mandate the moment your salary gets credited every month.
This way you may cheat your mind to an ‘out of sight, out of mind’ state and help you forget the urge to may unnecessary withdrawals.
Step #3: Build an emergency fund:
As the name suggests, this fund is aimed at helping you tied over unforeseen, unplanned and uncalled for a financial crisis if and when it arises in life like the ongoing Covid-19 pandemic or any natural calamity like floods, earthquakes, etc.
These kinds of an emergency situation can result in job loss, pay cuts, death of family members, medical emergencies and more, as we have been witnessing since early 2020 as well. This makes life and works completely uncertain.
Thus it is prudent to build a contingency fund as a part of your personal financial planning for the future.
As mentioned in step #2, you can start building this fund by setting aside a specified amount of money (via auto-debit mode) in a separate bank account and soon you will find a considerable corpus built to support you in days of emergency.
Other investment vehicles used to build emergency funds are fixed deposits, recurring deposits, liquid mutual funds too depending upon your need and risk appetite.
Experts say, ideally you should have 3 to 6 months of monthly expenses as your emergency fund.
Some are also of the opinion that you should better provision for 9 months of expenses in the face of very severe emergencies like the ongoing coronavirus pandemic.
Step #4: Define your financial goals:
Just as we know that it is important to know our destination in order to choose the right paths to set sail towards it; similarly you need to know and define your financial goals for effective management of personal finance for working professionals like you.
That will help you choose the various financial tools/ vehicles you can invest in to help you achieve your goals.
Financial goals can be defined broadly into 3 categories viz. –
Short term goals
Those are likely to come up within 3 to 5 years time; like setting off your credit card bills and/ or education loans, down payment for your first car.
That has a timeline of about 7 years to maturity, like your own marriage, childbirth, etc.
Long term goals
They have a timeline of 10 years and beyond and can include, children’s education, your retirement planning, down payment for your second home, wealth creations for a family vacation to exotic locations or even upgrading your car among other financial goals and aspirations.
To embark on your journey into personal finance management with proper knowledge and make conscious decisions for your future, we urge you to take a quick course on financial planning with Koppr
This has helped youngsters like you make wise decisions around their investments from a very young age and we believe it will be a value add to you as well. We are there to help you in case of further queries.
Step #5: Choice of investment vehicles:
For long term goals:
Make equity your best friend towards wealth creation for achieving your long term goals.
Since the subject may be new to you, begin with SIPs of Systematic Investment Plans in ETF (Exchange-traded fund) schemes and/ or mutual funds with maximum equity exposure.
This involves a monthly debit of a specified amount of money on a particular date of the month for 5, 10, 15 or 20 years and more depending on your investment horizon and the time you have to see your dream mature.
Given that you are only in your 20s, time is the magic potion that you have on your side that gives the power of compounding enough time to show its magic to create phenomenal wealth for you over a period of time as most of your long terms goals defined earlier are likely to surface at least a decade and beyond from now.
This will allow your money to generate enough wealth for you while you can happily concentrate on your career development and in pursuit of other interests.
You must ideally have at least 4 SIPs on a specified date on every week of the month to reap the optimal benefits of rupee-cost averaging on your investments that happen all through the month.
Let us take a few examples here for a better understanding.
Refer to the table below that shows you the power of compounding on your wealth. Say you are 23 years old today and have invested INR 5000 in an equity-based SIP for 7 years that have yielded you a corpus of INR 6,10,000 after 10 years at a modest return of 10%.
The same investment if continued for 10 years can get you a corpus of INR 10, 33,000.
However, if you keep that money into the account for 20 years without further feed, your yield increases to INR 27,96,000 without any further effort from your end.
And say if you have been patiently feeding your SIP for 20 years and kept it for 10 years more, they can build a wealth of INR 1.04 crores against an investment of only INR 12 lakhs!
Such is the magic of compounding!
|SIP in Equity Mutual Fund||SIP in Equity Mutual Fund||SIP in Equity Mutual Fund||SIP in Equity Mutual Fund|
|Age||Age 23 years||Age 33 years||Age 43 years||Age 53 years|
|Instalment amount||INR 5000||INR 5000||5000||5000|
|Term of investment||7||10||10||20|
|Term to maturity||7||10||20||30|
|Rate of interest/ Return||10%||10%||10%||10%|
|Total amount deposited||INR 4,20,000||INR 6,00,000||INR 6,00,000||INR 12,00,000|
|Total return earned||INR 1,90,000||INR 4,33,000||INR 21,96,000||INR 92,00,000|
|Maturity Amount||INR 6,10,000||INR 10,33,000||INR 27,96,000||INR 1,04,00,000|
The best part about these investments is that in case you are in need of money, you can always make partial withdrawals from the investments buying selling a bunch of units without having to liquidate/ break your investment.
SIPs have been known to help support the long term goals of youngsters like you in ways more than one.
As you grow in your professional life and your income increases, and you get your extra incentives/ bonuses, ensure that you buy more SIPs and also invest in a few fundamentally stocks/ equity shares, as they too are known to build wealth over a period of time.
You must also consider investment in ELSS (Equity Linked Savings Schemes) as they are tax-efficient U/S 80C and will help you create wealth and save tax as well.
And we all know, tax saved, is income earned! To know more about managing finances and monitoring your investments we urge you to download the Koppr app from the Playstore to gain further insights.
For short/ medium-term goals:
If you are a risk-averse person, and your investment horizon is less than 10 or 7 years, you have an array of investments options to choose from for peace of mind. Most of these debt and equity-related instruments are tax-efficient as well to ensure you save tax and thus further make money that way.
- Bank FD –
If you choose a bank fix deposit for a term of 5 years, you can avail of tax benefit U/S 80C.
- Public Provident Fund –
This has been an all-time favourite and a must-have for all Indians as it helps create a retirement corpus with the best return in the debt market with a tax-free interest of 7.1%.You can maintain a PPF account with just INR 500 a year.The maximum annual contribution allowed is INR 1.5 lakhs. Principal invested gets a tax benefit U/S 80C too.
- ELSS –
It has a 3 years lock-in and maturity in 10 years. This is because this too gets you a tax break U/S 80C.
- Debt mutual funds, liquid funds and bonds –
Being inversely related to the stock market, they are known to yield better returns compared to bank FDs.
- Bank FD –
To learn more about personal finance for working professionals like you and to have your query resolved, download the Koppr app from the Playstore and get in touch with your personal financial planner today!
The top #4 ways to be mindful of money mistakes:
Managing personal finance for working professionals for you needs some study and interest from your side as we by now understand.
However, there are many that land up making money mistakes that can have lasting consequences of guilt of the opportunity cost lost. Let us take look at a few common money mistakes young professionals must avoid.
1) Living beyond your means –
This is the most common mistake youngsters make early in their careers with newfound financial freedom.
If you keep spending more than your earnings for long; it can make it very difficult for you to gain back financial stability.
Thus ensure you budget your expense by the 50:30:20 rule from the very beginning to live and manages expenses effectively.
2) Beware of the debt trap –
Be mindful of your spending on your credit cards or borrowing money from people to meet your flamboyant living expenses in the early years of your career. This is because there is a huge opportunity cost lost in the process.
There are people who had to take personal loans to set off their debts that ran into lakhs of rupees.
This has an adverse effect on your morale and respect as a human being and might find it extremely difficult to get back on track. Thus as described earlier, pay off your debts/ loans at the earliest.
Making purchases unscrupulously –
Youngsters are found to find a high in picking up accessories, latest mobile phones and gizmos, bikes and clothing continuously. They swear by the associated exchange programs too.
However, these are all depreciating assets that become obsolete soon. Thus be mindful and limit your purchases in these segments.
Rather you should aim at picking up real assets like stocks/bonds, gold/ gold bonds or even land if you can afford them as all of these will always increase in value.
Delusions about financial goals in life
– there are very many youngsters who live beyond their means and/or have no savings in their accounts even if they are earning a decent amount of income.
This is because they have not spent time to understand/ define their life purpose or define their life’s financial goals.
Thus planning for personal finance for working professionals like you eludes them, leaving them grappling with their finances till late in life.
Thus start today and get your personal financial planning in place with your personal financial planner from Koppr and start your journey into wealth creation and realise your financial dreams with élan!