Your habits will determine your future.’ It is habits gained at an early age that are the cause of wealth, happiness, stress, relationships, and, of course, health. Habits acquired at a young age are difficult to shrug off. If you are young, you may have been advised to start saving, which is actually good. The sooner you start the better.
However, it may be important to know that simply saving money in a bank account does not help. One needs to find ways to become financially independent by building wealth, which requires looking at ways to generate income for the long term. Let’s take a stepwise look at how the youth can plan for their financial freedom.
1. Pay your debts first
When you are young, you do not have as many responsibilities as an average adult does. You can use this time that is your 20s, to pay off any education loan or credit card bills on time. Apart from reducing interest burden in the later years, prompt payments help you build a good credit score which will come handy when you need to take a home loan in the future. Taking control of your finances early on is key to saving more and efficiently.
2. Life Goals
Every time you leave your house, you have a goal of where you have to reach. Similarly, when you start your financial journey, you need to have a goal of where you want to reach.
Define financial freedom for yourself in specifics. Flag the smaller goals you need to score before reaching achieving financial freedom. Remember to provide for all expenditures and take insurance covers for your liabilities, so that the burden on payment does not fall on the near and dear ones.
Have a timeline for each goal along with the fund requirement for achieving it, keeping inflation in mind.
3. Prepare a Budget
To achieve each goal, we now have an idea of the requirement of funds for which we will have to provide. But in order to do so, we need to get a fix of our earnings and expenses.
Saving before spending should be the motto. One can take the benefit of automatic saving by allocating a part of the salary to a saving instrument of your choice. This way the net salary after saving will be available for expenses. Preparing a budget and sticking to it is an important first step towards achieving your financial goals.
4. Look for ways to create opportunities for you
In your younger years, you have the time and the capacity to learn new things. Become an expert in your field of work or explore other ways to make a living, especially if you are in an obsolete field. Strive to get higher-paying jobs in your earlier years of employment, as it will be easier than making a switch when you are older and have responsibilities. When you earn more, you can save more and invest more.
5. Educate yourself
Do not blindly go by recommendations that you get from friends or what you read in the media. A stock may have jumped 160% in 3 months time, but unless you fully understand why that happened, you may lose money chasing these quick profits. Many Indians lack financial awareness, despite the multiple means to educate oneself. Understand the risks associated with the markets, understand ways to balance these risks and seek advice from professionals as investments can be overwhelmingly time-consuming to some. There are so many registered investment advisors (RIA) out there, who are licensed to give you advice on what to do with your money to fund future goals. There are also multiple investment vehicles made available to retail investors. You only make wise choices if you are well informed.
6. Don’t Postpone Investing
Start small new earners are often intimidated by the markets or any form of investment as it could feel like a big spend. Whether it is a popular company stock that you read about in the newspaper, an apartment, or even gold. All of these investments appear to be out of reach. But that is not true. If you are new to investing in market-linked tools, you can start with mutual funds that have SIPs (systematic investment plans) as small as Rs 100. It is not difficult to set aside Rs 100 or Rs 500 for your future. Moreover, these funds are actively managed by experts, making them safer that picking stocks on your own.
In case of gold, try gold ETFs; for debt-related investments, go for government’s small savings schemes. The point here is that we tend to fear the unknown but to learn and understand what works, we need to try investing, even if that means starting small.
7. Avoid Credit
In this age of digitalization, one does not get the feel of money leaving your hand the way one used to get earlier while exchanging money for goods. More often than not, one ends up overshooting their budget.
It is important to draw a ‘Laxman Rekha when it comes to spending and never, repeat never, jump over this spending line and borrow money to meet short term needs. If at all one has to use a credit card, ensure that it is paid on time and in full.
One should learn to live well below their means with their goals in front of them. Discipline in spending is an importantt part of meeting financial goals.
8. Know your Investments
Saving money is good, but saving in low interest-bearing instruments that barely beat inflation is wasting most of the sacrifices made in saving. There was a time when insurance products were sold in the country as saving products. Though the general population is now aware of the difference, they still end up saving in instruments without any planning or pegging it to a goal. The right financial instrument needs to be selected to meet a financial goal and for that, one needs to either educate them or take the help of a financial advisor.
Starting at a young age has its benefit, however small the saving may be. Compounding wealth needs time on its side apart from decent returns. As a youth one has time on their side, the only decision they need to take is selecting an instrument that generates good and steady returns.