If you're a 20-something, you may think financial planning at this stage in your life is a waste of time, if not completely pointless. But by starting off now, you are allowing yourself to build on a solid foundation.
1) Time is on your side
This is your biggest asset right now.
Let’s say that you start saving at the age of 25 with the purpose of accumulating Rs 1 crore by 65. For ease of understanding, let’s assume the rate of return as 9%. To amass this corpus, one would need to invest Rs 2,140 on a monthly basis for the next 40 years.
Delay this exercise by just 5 years. If one starts investing at the age of 30, acquiring the same corpus would require an investment of Rs 5,460 every month. If one starts investing by 50, s/he would have to shell out Rs 51,700 every month for the next 10 ten years to reach the target of Rs 1 crore.
The sooner you start, the lesser the amount you have to tuck away. So however small the amount is, start saving right now. Even if it is just Rs 1,000/ month, don’t delay.
2) Do not ignore equity
Over the past few years, India has been battling with inflation. According to data released by the Statistics Ministry in New Delhi, the Consumer Price Index, or CPI, rose 7.31% in June and 8.28% in May. In September it was down to 6.46%. But the point remains – inflation erodes the returns. It is the silent killer where your savings are concerned.
Take the most popular savings avenue – a fixed deposit. An investment in a fixed deposit assures you of a definite and assured return, let’s say it is between 8-9% for a 1-year deposit. Now take tax and inflation into account, and your investment would have defeated its purpose.
Equity is one asset class that manages to outperform inflation over time. And, it does have a tax break in the sense that the tax on long-term capital gains is zero, which means you pay no tax on the return you earn from your investments if you hold it for at least a year. In the long run, this amounts to a huge savings. In fact, stocks and equity-backed investments (equity mutual funds and equity oriented balanced funds) are the only asset classes which are completely exempt from tax on long-term gains.
So earning an annualised return of around 15% from a diversified equity fund over a decade and paying no tax is definitely a smarter way to build wealth.
3) Make it automatic
The investing must be simple. If not, it can be a major deterrent. The best way a young individual can participate in stocks is by investing in an equity mutual fund. Select a diversified equity fund to enter the stock market. Avoid thematic and sector funds when you are starting to build your portfolio. (Read 5 reasons to invest in an equity fund).
Now that you have narrowed down on the exact fund, invest via a systematic investment plan, or SIP. Once you put an SIP in place, the amount that you decide to invest will automatically be deducted from your bank account and invested at the date pre-selected by you. With no effort on your part, your savings will be channelised into the fund of your choice.
4) Start a PPF account
The Public Provident Fund, or PPF, is the only exempt-exempt-exempt, or EEE, scheme available in India. This indicates that it is exempt from tax all the way. When you deposit money in the account, you get a tax exemption under Section 80C. The interest earned is also tax free. On maturity, the lump sum (interest earned + principal invested) is not taxable.
Being backed by the government, complete safety of the product is assured. Use it to fund your long-term goals such as buying a home or retirement.
The return is fixed every financial year and is currently 8.7% per annum. This is an excellent long-term savings vehicle which has an assured return, complete safety, and a tax break.
Read 5 ways to make PPF work for you to get a better understanding.
5) Avoid unnecessary debt
Just because you are earning, don’t use it as an excuse to go on periodic spending sprees with your credit card to aid you. There is no free lunch with a credit card.
Sure, if you spend beyond your repaying capacity, you can roll over the debt and pay a minimum amount every month. However, it does not come free. Credit cards charge prohibitively high interest rates in the range of 30% to 45% per annum if the outstanding credit card bill is not paid.
This interest is levied not only on outstanding dues but even fresh payments. Spend within your means and pay off your credit card dues on time. You get into the debt trap now, not only will it eat away into your limited savings, but sets a bad foundation for you to build upon.
