The urge to shop and swipe a credit card to buy the latest device is sometimes irresistible. To manage expenses responsibly and plan for a secure future, it is essential to be financially disciplined.
But in this day and age, where knowledge is abundant and shopping options are easily accessible, financial literacy is necessary. Convenient access to financial apps and investment options makes financial planning less stressful for young adults. Here are 12 financial tips that will help with smart money management.
#1 Track your Expenditures and Practice Self Control
The mall culture in India, which started in the 1990s, has changed how people consume products and services. Two things happen when we step into the mall: We start looking for stores with discounts and offers, and credit card representatives hungrily march towards us with lifetime free credit cards.
We dodge the credit card gang but often end up buying a thing or two because there is a discount or a sale. We have records of how many rupees are deducted every time we use our credit or debit cards.
But how many of us go home and tally the money spent with what is left in our savings account? The tip is to track all expenses diligently. If you feel even remotely guilty that your account is bottoming out with another purchase that can wait, stop and reconsider making that purchase.
However, if you still need to buy that item, you could use your credit card, but only after carefully calculating if you can manage the new and existing debt.
#2 Create a Budget
Keep a diary to track monthly financial expenses. There are two simple categories where money is spent:
- Necessary Expenditure: It includes all your expenditures on necessities like groceries, bills, travel costs, education expenses, rent, etc.
- Conspicuous Consumption Expenditure: It includes spending on entertainment and luxuries such as dining out, spending on luxury items, and watching movies, basically something we can live without.
Young adults could also go back to the basics and create a monthly budget. Let every rupee earned be accounted for. The moment we know we have extra cash that has no immediate use, we tend to make unplanned purchases. But if we allocate some monthly amount to it, it would help us make better financial decisions, wouldn’t it?
#3 Adopt The 50-30-20 Rule
The 50-30-20 rule can help in creating our monthly budget.
- Assign 50% of your income to necessary expenditures.
- Spend 30% of your income on wants that are not essential, such as dining out, vacations, movies, and new gadgets.
- Allocate 20% of your income to savings and investments. This includes having an emergency fund, mutual fund investment, SIP, etc.
Mutual fund investments are subject to market risk, so it is vital to have enough financial literacy before starting the journey.
#4 Start Investing from an Early Age
Start saving early to live comfortably later in life. Many of us dream of a retirement home, but are we stringent about our retirement planning?
Suppose we started earning a decent salary from 25 years of age. Suppose we invest Rs.1000 monthly in a mutual fund from as early as 25 years of age and continue investing until we are 50.
Let’s consider that we get a conservative return of 12% yearly on our investment. In 30 years, we would have invested Rs. 3,60,000 and earned an estimated return of Rs. 31,69,914. So, our total corpus at 50 years of age will be Rs. 35,29,914.
That is the power of making smart financial decisions. Start investing from an early age to take full advantage of the power of compounding and adequately prepare for retirement planning.
#5 Create an Emergency Fund
Our emergency fund is how we pay ourselves first. We should have at least three to six months’ worth of monthly income kept aside for emergencies such as sudden hospital admissions, accidental injuries, sudden job loss, family crises, etc.
An emergency find should be a non-negotiable expense. Young adults with enough money in emergency funds can live a relatively stress-free life even if they experience overwhelming situations in life.
#6 Protect Wealth against Rising Inflation
The retail inflation rate jumped to a 5-month high at 7.41% in September 2022. The average retail inflation rate in 2022 is well above 6%. If our return on investment is less than the inflation rate, we are losing wealth.
We should create a portfolio of investments with higher returns than inflation. Investing in a balanced mutual fund (having exposure to both equity and debt) can give us a 9-12% annual return in the long run. Also, investing in gold can help during an economic downturn or recession.
#7 Health First
A visit to the hospital, even for a minor injury, can end up costing us thousands. I experienced this first-hand when I suffered a hairline fracture after trying to move furniture.
Even though we may have money saved in our emergency funds for such unforeseen events, getting health insurance is better. We should check how we can benefit from health insurance coverage at work. If we need to buy health insurance independently, we can get individual or family floater health insurance.
#8 Don’t Fall for Scams or Bad Financial Advice
We can’t get rich overnight. Also, financial advice from people with half-baked knowledge will throw us in a loop of bad financial decisions. Hundreds of scammers present us with financial schemes that assure an impractically high return or interest rate on our investment.
Thousands of scammers invent new schemes daily, which will only rob us of our hard-earned money. So block and report such callers instantly.
It is essential to know that what worked for your friend or family member might not work for you. Always research before investing money into investment schemes, no matter how alluring the plan seems or how much you respect the person selling you the scheme.
#9 Learn about Taxes
By the time we grasp how much we are losing to taxes owing to a steady income rise, it is too late. We should calculate how much money we will be left with from our salary after all the deductions. Financial literacy cannot be achieved overnight, but we can stay on top of our taxes by understanding how income tax works and what are our tax-saving options.
#10 Negotiate Salary and Diversify Income Streams
We usually cut down on expenses to save money. But we can also ask for a raise at work, switch to a high-paying job, or find alternate sources of income. Many young adults earn extra income through gigs such as blogging and tutoring. About asking for a salary hike, we can pursue our employer for a raise based on our performance and skills.
The worst that can happen is they will say no, but at least that leaves us with the option of looking for growth outside our current employment if need be.
#11 Increase your Credit Score and Lower your Credit Utilisation
A credit card often helps us live better if we plan our finances well. From our first two-wheeler to our first apartment, our credit score tells a lot about us as young adults.
A good credit score, preferably above 700, makes us an asset and allows financial institutions to disburse financial assistance faster when we need it.
If you have a credit limit of Rs. 50,000, try to limit your credit utilization rate to 25% or below (which means Rs. 12,500 or below). As a rule, don’t allow your credit utilization rate to exceed 30% at any cost. If you maintain this, it will positively affect your credit score.
#12 Hire a Financial Advisor
If you have thought that only people with millions in their accounts hire financial experts, it is time to dispel this myth. We often rush to a CA when it is time to file returns. This habit can impact our finance gravely.
A financial advisor helps us develop a plan that suits our financial needs. Financial advisors also help with wealth management by recommending investment products to achieve our financial goals.
To Sum It Up
Young people have the power to make rewarding financial decisions. The first step towards financial literacy is to start saving by creating a budget with the help of the 50-30-20 rule. We should not treat emergency savings as a negotiable expenditure. It is essential to prioritise investing in health insurance.
Many young adults are still getting a grasp of the idea of wealth management, early investment, and professional financial advice. At Koshex, we help you do more with your money by offering smart investment options. Investors can invest in technology, clean energy, automobile, US equity, etc.
The aim is to keep the investment diversified based on the investor’s preferences and profiling. It marks a wholesome digital journey toward financial security.
What is a good credit score?
A score near 300 is considered poor, and one near 900 is considered good. Generally speaking, a CIBIL score above 700 is considered good.
Is SIP a good investment?
Yes. We can diversify our portfolio by starting a SIP in two or more funds. Investments in certain funds are eligible for deduction from taxable income under Section 80C of the Income Tax Act.