Financial Planning: If proper money planning is done after starting earning, then financial security can be strengthened in the coming years. The age of 25 is an important time to start financial planning. The habit of small savings and proper investment at this age can help in building a big fund in the future.
First decide your financial goals
Before you start saving and investing once you start earning, it is important to understand for what purpose you are saving the money. Your goal could be buying a house, marriage, studies, travelling, retirement or creating a big fund for the future. The clearer the goal, the easier it will be to decide the path of investment. Divide your goals into short term and long term. This will help you decide how much money to invest and for how long.
Understand from the budget where the money is going
Many youth earn well, but till the end of the month they do not know where the money was spent. Therefore, it is important to keep track of income and expenses every month. This helps in identifying unnecessary expenses and earmarking money for savings. If you want, you can adopt the 50:30:20 rule as initial budgeting. In this, it is suggested to keep 50% of the income for necessary expenses, 30% for desires and 20% for savings and investment. However, this is not a strict rule. This ratio can be changed according to your income, responsibilities and goals.
Don’t ignore emergency fund
It is also important to create an emergency fund before starting to invest. This money comes in handy in case of sudden job loss, medical expenses or any other financial need. Generally, a target can be set to keep an amount equal to 3 to 6 months of essential expenses as an emergency fund. If there is a lot of uncertainty in your job or income, then a larger fund can be kept as per the need. It is better to keep this money in a place where it can be easily withdrawn when needed.
Lifestyle increases, but savings do not stop
It is common for expenses to increase as salary increases. A new phone, expensive restaurants, shopping or frequent online purchases can gradually spoil the budget. This is called lifestyle inflation. To avoid this, instead of spending the entire additional amount on salary increase, increase savings and investment. Understanding the difference between needs and wants can be one of the best financial habits you can form at this age.
Use credit cards wisely
Credit card provides convenience, but if the outstanding amount is not repaid on time, the interest burden may increase. Using more credit than required leads to increased debt and can also impact savings and investments. Therefore, try to use the credit card only as much as you can repay on time. It is also important to reduce high interest debt on priority.
Start preparing for investment now
Once the basic preparation of budget and emergency fund is done, then investing can be started as per your goals and risk appetite. A major advantage of starting investing at the age of 25 is the longer investment period. Compounding gives your investments more time to grow in the long run.
There are different options available for investment, such as-
Equity Mutual Fund: To build wealth in the long run.
Index Fund: Option to invest in market indices at low cost.
SIP: A way to make regular investing a habit every month.
PPF: An option for long term savings.
NPS: Option to create a fund for retirement.
RD: For people with relatively low risk investment needs.
Direct Equity: For those with good market understanding and higher risk appetite.
The biggest advantage of being 25 is time
Suppose two people invest ₹5,000 every month and get an average annual return of 12%. If one person starts investing from the age of 25 and the other from the age of 35, the first person gets 10 extra years to invest. This long time can create a big difference in the final corpus of both through compounding. However, actual returns will depend on market performance.
FAQ
What percentage of salary should be saved at the age of 25?
As a rule, at least 20% should be saved. But if you have less family responsibilities, you can increase it to 30% or 40%.
Is there risk in stock market or mutual funds?
Yes, there is risk in market based investing. But if you stay invested through SIP for a long period (5-10 years), the risk reduces significantly and you get better returns.
Where is it right to keep emergency fund?
Emergency fund should be kept in a savings bank account or liquid mutual fund from where money can be withdrawn immediately if needed without any penalty.
How can lifestyle inflation be avoided?
Instead of increasing your expenditure immediately when your salary increases, increase your savings and investment (SIP) amount in the same proportion.
How to use credit card properly?
Use the credit card only as much as you can repay before the due date of the month. Avoid the mistake of withdrawing cash or paying minimum due.