Most young people are either reckless with money or clueless about it. Making best financial decisions in your 20s that can have future ramifications sounds greek to the most, but they are better off making them.
When you’re in your 20’s, most important financial decisions of life like buying a house, building financial assets and retirement corpus seem far off. Why should you worry about it now?
Then, the reality hits; you’re almost 30, and you haven’t even started with the building blocks yet. You haven’t purchased an insurance plan yet. Or paid off your education loan. Or improved your CIBIL score.
While you might be ready to just throw in the towel and take out a loan to help wash away all your short-term problems, don’t panic yet – you still have time to start making good financial decisions and developing good habits.
Whether you’re 20 or 29, it’s not too late to start making these important decisions to set yourself up for the future. Here are the top 9 financial decisions you can make right now that you’ll thank yourself for later. Trust me.
1. Set financial goals
While big purchases may seem far off, it’s good to start thinking about your big financial goals early. Do you want to be able to buy a home in 10 years?
Maybe when you’re finished with higher studies, you want to pay off the debt early or travel solo to Europe for 3 months or buy a sedan-class car or your own house before you get married. What kind of budget would you need for that?
Setting goals early can help you with every other decision you make, since you’ll always have that in the back of your mind. Goals can also be revisited and changed when needed – but having an idea will make your path to financial success much easier to navigate.
Oh, and the best way to stick to your financial goals is to write them down in a journal or diary. Don’t ignore this part.
2. Determine a budget
It’s easy to get caught up in the changes that happen when you enter a job, which means it’s easy to spend money.
The sooner you figure out how to live within your means, avoid bad financial habits that prevent you from accumulating money, the more money you’ll have set up for yourself to enjoy the finer things later on in life.
Set up a monthly budgeting plan that allows you to put money away in small investments, pay off any loans, take care of essentials, and also give a little breathing room without suffocating yourself.
3. Pay off education loan ASAP
The first thing you have to do as you start working is to repay your education loan. This should be your top priority. Begin paying it off as soon as you can.
You should be able to figure out how much you can contribute to loans once you have your budget figured out. Even if it’s a smaller amount than you’d like to start, any amount of money paid back is better than nothing at all.
Better yet, work out a plan where you could pay higher than the stipulated monthly installment or transfer a big chunk at the end of the year to your loan account.
Most banks won’t mind that. The private banks do levy prepayment penalties of 2-2.5%, the public sector banks usually don’t. Check with your bank and try to negotiate if they have prepayment charges.
If you put debt repayment off too long, a chunk of your contributions will go to servicing interest payments, and you’ll end up paying back way more than you initially borrowed.
4. Build an Emergency fund
In times like today when a global occurrence can set off a chain reaction of catastrophic events and jolt a nation’s economy before you know it, you should have your own emergency back-up ready.
This is more important when you are a young executive. Remember, when shit hits the fan, it’s often the newbies who get the axe.
Most young executives tend to splurge more and save little.
Be the minority. With every paycheck, be sure to put away some amount of money towards a savings account designated for emergencies.
Some experts suggest 20% of your post-tax income but decide what amount you can realistically contribute (remember that budget? You’ll be using it a lot.)
Aim for a goal of 3 months’ worth of expenses, and then 6 – or, save as much as you feel secure about.
5. Buy health insurance
Getting insured early on in your life is like building a wide moat around your financial castle. If you buy it late, the moat will only get narrow.
Obviously, life and car insurance are incredibly important, but what we’re talking about here is health insurance.
If you have just started working, buy health insurance even if your compensation package includes one from your company. Remember your company’s cover will only last as long as you are employed there.
The sooner you purchase health insurance, the cheaper it will cost you – now, and in the long run. Other benefits include getting cumulative bonus cover every year that grows into value the longer you have it. Talk about a great decision!
6. Build up a robust credit history
Setting yourself up with good credit early can be the key to getting the assets in life that you want.
Any time you need to borrow money – whether that be for purchasing a car, buying a home, going abroad for executive education or starting a business – your credit score will be checked.
If you have a good CIBIL score, your price of borrowing will be lower, and you can borrow money whenever you may need it.
The best way to build up a solid credit score is to repay your EMIs in time.
Even if it’s monthly credit card installment of a few thousand rupees, ensure you repay in time. Frequent misses will spoil your financial profile and could become a major problem at a later stage in life.
7. Keep all your financial documents organized
Make sure you have both scanned and photocopies of your birth certificate, PAN, Aadhar, education degrees, passport, and other identifying documents.
Keep them along with your tax returns, bank account information, investment account information, and other similar documents.
I suggest finding an expandable file holder online (I use Google Drive) or at your local office supply store and labeling each folder section so you can keep all the documents organized in one place!
There will come a time when you need these documents, and you will thank your younger self for being more organized so you don’t have to scramble.
8. Save up for retirement
Sure, retirement seems like a faraway dream right now – but ask any retiree, and they’ll tell you it comes sooner than you think.
The equation is simple: the sooner you begin saving for retirement, the more money you’ll have when you do retire.
Invest in a diversified equity mutual fund, open a public provident fund account (PPF) with your bank, and subscribe to the National Pension Scheme (NPS) if your company doesn’t offer you one.
These instruments alone, of course, will not guarantee a big corpse saved for your retirement, but they provide you a great headstart to leverage the benefits of compounding (I will address compounding in a different post).
9. Set up a will
Again, this relates to something that hopefully won’t happen for a while, but you can’t be too careful.
Be sure to figure out how you’re going to allocate your assets so you don’t leave loved ones with a mess on their hands when you pass on. It feels good when you finally just get it over and done with.
A living will isn’t a bad idea, either – this helps determine what should be done should you end up in a situation where you are still alive but unable to express informed consent.
Having all of this done years before you have to face it will make going through this situation so much easier – for your peace of mind and your wallet.
If you’re in your 20’s, have you taken action on any of these decisions? If you’re older, what financial decisions do you wish you had made sooner?
Let me know in the comments, I’d love to hear from you!