The article is about young individuals who have to make critical financial decisions early in their life regarding online investing, insurance and financial security. These personal finance lessons can enable them to plan for a good retired life, arrange adequate medical and financial insurance for themselves and their family, provide for good education for their children and ensure financial security.
The financial world has become very complex with the rising cost of inflation, multiple options, and a longer life span.
- An individual now enjoys a much longer life and thus has to provide for a more extended period for expenses.
- Provision for children’s education has to be made with rising costs, higher aspirations and multiple opportunities.
- Even a couple of decades later, planning for retirement has to be made from now considering the rising living costs.
- Adequate medical insurance is required for family and aged parents to provide for unforeseen medical emergencies or accidents.
- Financial planning is required to invest in property and rising real estate costs.
So young individuals will be at a great advantage if they learn about these 10 personal finance lessons and use them in their life.
1️⃣ Setting clear financial goals:
A person may continue to live without any financial goals and targets. This can lead to unforeseen problems and lead to a financial disaster. The goals should be clear, achievable and time-bound. Impossible goals should not be set. The goals should be clear, like an x amount after y years.
The goals should be specific, measurable, actionable, realistic and time-bound.
Some financial goals can be:
- Planning for buying a house
- Planning for buying a new car
- Planning for saving for marriage
2️⃣ Start as soon as you can:
A person who starts investing in the mid-twenties will have a significantly higher amount at the time of retirement than a person who starts investing at the age of 30. This is due to the power of compounding. So a young individuals should start investing very early in their working career. Interest is earned on interest due to the magic of compounding. Saving at a later age can lead to a lower corpus at retirement and a lower quality of life post-retirement.
3️⃣ Save a certain fixed amount of salary every month:
This is the best and most straightforward way to start saving. A target should be fixed to save an amount every month. The target should be followed strictly every month. The amount, say 15 per cent, can be invested in a recurring deposit, and the same can be shifted to a long term deposit at the end of the year if required.
Such decisions can impose financial discipline and avoid wasteful casual expenses, which can drain the pocket. Also, cash instead of credit cards should be used.
4️⃣ Prepare a budget:
Individuals also can plan their income and expenses through a financial budget.
The financial budget includes a monthly and yearly budget.
The monthly budget involves fixing paying off monthly expenses like grocery, electricity, rent and other recurring expenses. The actual expenditure can be compared to the set budget, and variances studied. The expenses may vary due to higher costs than budgeted.
5️⃣ Take adequate life and medical insurance:
Individuals will have family members dependent on their income. They should take a term life insurance plan at a young age of an adequate amount, about 10 times their annual salary. This will cover their family’s expenses in the case of their unfortunate demise.
A medical insurance plan should be taken for themselves, their family and parents to ensure that unforeseen medical emergencies and mishaps can be managed.
6️⃣ Start planning for retirement early:
Planning for retirement should be done early. With inflation rising, the current salary would be inadequate to cover post-retirement expenses. Also, health care expenses are likely to zoom in due to diseases in old age. So suitable investment should be made in funds, which can beat inflation and generate a suitable corpus at the time of retirement from which post-retirement income has to be earned.
7️⃣ Manage your borrowings smartly:
Loans can be taken for purchasing movable property and immovable property. While immovable property like a flat appreciates, movable property like motor cars depreciates. Debt should be taken preferably only for appreciating assets.
Also, surplus funds should be used to retire debt.
8️⃣ Make your tax planning properly:
Tax planning can create assets like property, child education and retirement planning. A tax deduction is available for property purchase, with interest and principal both deductible. Deductions are also available for pension plans. Planning for taxes can reduce your tax liability and also create a corpus.
9️⃣ Invest according to your risk profile:
All individuals are not the same. Some are averse to risk, some are comfortable with a bit of risk, and some are adventurous. Their investments should reflect their temperament. The risk-averse should invest in a fixed-income fund; the moderate-risk taker should invest in a balanced fund, while the high-risk taker should invest in equity funds.
It must be remembered that the low-risk taker should not avoid equity funds totally, while the high-risk taker should have some exposure to fixed income schemes.
Also, the lower the age, the higher exposure to equities should be.
🔟 Learn about investments:
Young individuals should read about investments from various books available about the various types of investments, returns, and risks. There are a lot of online investment apps available for an investor to broaden their knowledge.
Learning about investments at an early age can help them make proper decisions like planning for retirement, investing in property or educating a child. Investments should be made to ensure that the returns beat inflation and enable fulfilling the goals without difficulty. You can find out how to invest like Warren Buffett and Charlie Munger and set your goals.