How One should Plan Finances in their Youth?

Arjuna (a fictional character): Krishna, As discussed in the last article, people in their 20s tend to make a lot of common financial mistakes. How important do you think this phase is for everyone from a financial perspective?

Krishna (Fictional Character): Arjuna, the twenties are indeed a pivotal phase, where the seeds of financial discipline and planning bear fruit in the years to come. It's a time to build, nurture, and solidify your financial foundation. Wise financial planning in your twenties not only secures your future but also ensures you live your present life more fully and without regret. Let's explore how to effectively navigate this decade financially.

Arjuna (a fictional character): Krishna, How should one effectively plan finances in their twenties to ensure a balanced approach to planning, saving, investing, and spending?

Krishna (a fictional character): Arjuna, the cornerstone of financial stability in your twenties lies in meticulous planning. One should go for a three-stage approach that includes planning for overall financial goals, focusing on saving and investing, and making wise expenditures.

Planning:

1. Preparing and reviewing your monthly budget: Regularly assessing your income and expenses helps identify unnecessary expenditures and reallocate funds towards savings and investments.
2. Credit Score: Maintain a good credit score, as it is crucial for major financial decisions, like obtaining a loan for a new home or vehicle. A credit score above 650 is considered a good credit score.
3. Life Events: Plan for significant life events, such as marriage, and anticipate the expenses that follow. There are various tools provided by mutual fund brokers that will help you financially plan your big expenses. For example, if you want to buy a car in 5 years,  the site can help you ascertain how much you should invest monthly to achieve the goal.

Saving/Investing

1. Savings Habit: Cultivate the habit of saving a portion of your income regularly, regardless of the amount. This discipline is foundational for wealth accumulation.
2. Emergency Fund: Create a contingency fund covering at least three months' expenses. Life is unpredictable, and being prepared can make all the difference during unforeseen events.
3. Insurance: Invest in term life, accidental, and health insurance plans. These safeguards protect you and your loved ones from financial hardship in the event of unexpected events.
4. Investment: Start investing early. Whether it's equities, mutual funds, or retirement accounts, the key is to begin. Investments made in your twenties can significantly compound over time.

Expenditure

1. Buying a New Home: While purchasing a home is a milestone, ensure it is within your financial means. A well-planned home purchase sets a solid foundation for your financial future.
2. Four-Wheeler Purchase: When buying a vehicle, aim to pay a maximum sum as a down payment and minimize the loan amount. This strategy reduces interest costs and the financial burden of monthly payments.
3. Not to get carried away in FOMO: Heavy expenditure on buying luxury items will always be a threat to low bank balances.
4. Futures and Options Trading: Young people are often influenced by high-risk, high-reward F&O activities. But engaging in F&O with less capital and knowledge often leads to blowing up the entire capital.

Arjuna (a fictional character): Krishna, what should one learn from this entire process?

Krishna (a fictional character): Arjuna, In the early stages of the twenties, i.e., from 21 to 23, the focus is more on learning than earning. At this phase, many are still undergoing their education, and we think that since there is a little money to plan for, why plan? However, big achievements start with small efforts." In the mid-twenties, from 24-27, significant life events, including employment, business ventures, or marriage, come into place, and the curve slowly shifts from learning to earning, and maximizing available resources becomes the ultimate goal. At the later stage, i.e., 28–30, one's financial decisions are more inclined toward stability, and a balanced approach is generally followed. Financial planning is often neglected at this age, and a lot of people are left regretting this approach. The development of habits takes time, and the efforts that you put in today can become a strong foundation for your future endeavors.