Personal finance education is an ignored topic in our educational system. As a result of this, young adults are often struggling to manage their finances. Once they start their first job, they are clueless as to how to invest, how to stay out of debt, how to apply for credit and much more. To tackle this important issue, we are focusing on giving a few tips for financial planning for young adults.
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What is Financial Planning?
There are numerous definitions of financial planning. In simple words, it is the systematic and disciplined arrangement of finances to meet your financial goals along with ensuring financial stability. Financial planning is very important in young adults. Efficient money management from the beginning of one’s career will have long term positive impact. It will help to prioritize, save and invest money for your personal financial goals. Proper financial planning reduces stress.
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Difference Between Savings, Investment, and Insurance
Lack of knowledge can often lead to confusion among various terms in finance. The most commonly confused words are savings, investments, and insurance. Let’s take a look at these terms:
Saving: It is the process of setting aside a sum of money without spending, to be utilized for future emergencies. It is the money you want to access easily and quickly. It involves little or no risk. There are a number of options to save your money such as FDs, post office, liquid funds and so on.
Investing: The process of acquiring assets like stocks, bonds, mutual funds, etc, with the belief that the money invested will grow in size and fetch greater returns. Investments are selected to achieve long term goals. They have low liquidity and more risk across various options.
Insurance: It is a means to provide financial protection during future risks. There is no profit factor involved in insurance.
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7 Steps for Financial Planning for Young Adults
Let’s take a look at 7 effective steps that will serve as guidance for young adults to begin financial planning:
- Try to Take Risks: Does that sound contradictory? It’s common advice to avoid risk while investing to ensure steady results. But with high risks come high returns. Investments like equity stocks can give high returns depending upon the market dynamics. The initial years of your career is the best time to try out these risks. As you grow older, your responsibilities also increase. It becomes more challenging to take up such risks in the later stages of your life. However, investing in such instruments at your young age will give you adequate knowledge and expertise to opt for them later. Most of the risky investments surprise investors with returns.
- Increase Your Savings: Tasting financial independence for the first time will result in unwanted spending on things that give instant happiness. Most of the young employees spend the Initial earnings of their career this way. Instead of saving a portion of it, and spending the remaining will secure your financial stability along with fulfilling your wishes. Try to save a particular portion of your income each month. Then start increasing this amount every 3-6 months. Doing this will help you arrive at a position where you have saved a large corpus over time. This can be further used for investing or for any financial emergency.
- Increase your income: The word income is not a synonym for salary. Most of the youngsters consider salary as their only source of income and limit their earning ability. Income is the money you receive each month from different sources. This could be interest earned, dividends, monthly salary, rent and many more. After the initial years of career, try to increase your source of income. Make sure you have at least one additional source of income. This will give you the financial stability during uncertain situations like unemployment, additional expenses and so on. This will also improve your exposure to various investment schemes.
- Invest in Yourself: Investing in you is more important than investing in anything else.
- During the initial years of your career, you should learn as many skills as possible. This will nurture you to accomplish better job opportunities. A job is not the full stop to studying. Acquire new skills. Take up that online course. Go for additional training programs. Learn an extra language. Or if you have a passion, invest time in it. All this will help you later. It results in career growth and betterment.
- Health is wealth. This saying never gets old. Because it is a fact. Do not ignore your health due to work. Make sure you eat healthy, sleep on time and hit the gym if it is necessary. No wealth will be beneficial if you do not have the health to enjoy it.
- Spend quality time with your friends and family. Gadgets have replaced our real relationships with virtual ones. It is easier to communicate with someone far way via your personal phone, but speaking to someone in the same room has become difficult. This has to be changed. Build as many relations as possible. This will enhance your mental well being. It is a way of investing in you.
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- Know Your Financial Goals: It is important to pen down your life goals that require financial backup. Three years from now you might plan to get married. You need sufficient funding for marriage. This will help you invest in a scheme that will give you returns required to finance your wedding. In this way, realizing your goals and determining the time frame required for it, will help you prioritize and plan your investments.
- Start SIP’s: Systematic investment plans (SIP) are a very practical investment method. Slow and steady wins the race is the base of this method. Investing a small portion each month continuously will exhibit the power of compounding after a definite period. This will not affect your normal spending because it does not require a lump sum payment at one go. Most banks and financial institutions now offer SIP schemes. This has made mutual funds available to average Indians.
- Create an Emergency Fund for 6 Months: Uncertainty can surprise you anytime. Unemployment, illness, family emergencies, unexpected death are a few examples. To deal with this, you must maintain an emergency fund. This must cover at least 6 months of your expenses. If you do not keep an emergency fund, you will end up taking loans or credit from friends and family. This can trap you into debt. To avoid this, always maintain an emergency fund. Make sure investments for the emergency funds are risk-free (or low risk) and liquid.
Financial planning will help you achieve your life goals. Planning your finances will give you a clear picture of your future. This, in turn, will make your life peaceful and stress-free. Start financial planning from the early years. Make it a habit. This will surely reflect in the quality of your life.
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