FINANCIAL PLANNING TIPS FOR TODAY'S YOUTH

Set Goals

To succeed in any endeavour, it is important to set goals. Whether it is a game of football or investing, goals shape the game plan and provide direction to your efforts. Before investing, it is important to set financial goals and quantify them. Financial goals should be SMART - specific, measurable, attainable, realistic, and time-bound. Setting such goals not only help you build a plan but also streamline your investment journey.

Choose The Right Product

When it comes to investing, a plethora of options are available, but trusting your hard-earned money with these products is the real challenge. Investment instruments ranging from highly safe fixed deposits (FDs) to extremely risky speculative instruments such as options are available for investing at your disposal. However, one needs to draw a perfect balance between risk and return so that one can build sizeable wealth with peace of mind. The choice of the right product should be based on your risk profile and your financial needs.

Avoid Debt Trap

A debt trap refers to a vicious cycle of borrowing, struggling to meet debt obligations, and consequently accumulating more debt to cover existing payments. The term debt trap is associated with the inability to exit this perpetual cycle, leading to financial hardship. Generally, young adults are at a higher risk of falling into a debt trap since they are just at the start of their careers, and the expenses can mount up, nudging them to opt for loans. Moreover, in a bid to live flamboyant lifestyles, young adults are also turning to credit cards. If you want to use credit cards for your expenses, you should use them rationally, maintain a credit utilisation ratio, and make timely payments. These mistakes can negatively impact your credit score, making it difficult to borrow in the future. Hence, it is important to avoid such credit mistakes and budget carefully to avoid a debt trap.

Budgeting

Gen Z lives in a highly connected, virtual world. With the advent of technology, everyone is now closer than ever digitally. Hence, Gen Z can often become the victim of greed and desire by comparing their lifestyle with others. Moreover, Gen Z often tends to follow the newest trends and practices. A new trend, 'soft saving', is getting quite popular amongst Gen Z. This phrase refers to living a luxurious lifestyle now and saving minimally for the future. This approach can prove to be detrimental to your future, leading to a pay check-to-pay check lifestyle with little left for your future financial goals. It's essential to strike a balance between your desired lifestyle and allocating funds towards your financial goals.

Start Early

To build wealth, it is imperative that you start investing early. As soon as you get that first pay check, setting an amount aside for investing is the wise thing to do. When investments are started early and done for the long term, the power of compounding can turn small investments into huge funds. For instance, if you had invested Rs 1,00,000 in Sensex TRI 25 years ago, then its value today would be Rs 34,89,772, an XIRR of 15.26%. However, if you had invested Rs 1,00,000 in Sensex TRI 15 years ago, then its value today would be just Rs 9,17,060. Hence, it is essential to start your investment journey as early as possible.

(Source Ace MF. The investment periods taken into consideration are -

25 years - 31 Dec 1998 to 31 Dec 2023 and

15 years - 31 Dec 2008 to 31 Dec 2023.)

Invest Through SIPs

SIPs or systematic investment plans in mutual funds offer a flexible, systematic, consistent, and disciplined approach to investing. SIPs are highly accessible and affordable, allowing investors to start with an amount as small as Rs 100. With SIPs in mutual funds, one can start saving small amounts from their earnings and invest them in the long term to not only achieve financial goals but also build wealth. For instance, if you had started an SIP in mutual funds of Rs 10,000, 25 years ago, then its value today would be Rs 27,759,841, an XIRR of 15.06%.

(Source Ace MF. Returns of Sensex TRI. The 25-year period taken into consideration is from 10 Jan 1999 to 31 Dec 2023. The SIP interval is assumed to be the 10th of each month.)

Emotional Biases

Young investors are often motivated to invest due to herd mentality and the fear of missing out (FOMO). Investing on the basis of such biases, fear, and greed can not only lead to losses but can also lead to missed opportunities. Hence, while investing, it is important to stick to the fundamentals and have an understanding of the investment avenue, the objective of investing, and the associated risk.

Emergency Fund & Insurance Planning

The most inevitable thing in life is uncertainty, making it the most important thing to prepare for. You may never know when a rainy day arises in your life; hence, it is essential to prepare for these perils in life by insuring yourself. Moreover, one can also build an emergency fund, which can further prepare you for uncertainties in life. Preparing an emergency fund and securing adequate insurance not only safeguards your wealth-building journey but also eliminates the need to resort to loans during unexpected challenges.

Tax Planning

For young individuals just entering the workforce, tax planning is a crucial concept of financial management. While the complexity of tax laws may seem intimidating, one can learn basic tax laws and consult a chartered accountant or a financial advisor who can further guide in financial management and efficient tax planning.

To conclude, As the new generation sets foot in the professional world, embracing sound financial planning practices becomes paramount for a secure and prosperous future. By incorporating the aforementioned principles, Gen Z can navigate the complexities of financial management with ease. Moreover, opting for the guidance of a financial advisor can set the stage for a financially stable future.

https://finvestindia.com/services/best-financial-advisor-in-bangalore/

Disclaimer: Prashanth Jogimutt is a Mutual Fund Distributor (ARN 165858) registered with AMFI (Association of Mutual Funds of India).

The information contained herein does not constitute, and should not be construed as investment advice or a recommendation to buy, sell, or otherwise transact in any security or investment product or an invitation, offer or solicitation to engage in any investment activity. It is strongly recommended that you seek professional investment advice before taking any investment decision. Any investment decision that you take should be based on an assessment of your risks in consultation with your investment advisor.

To the extent that any information is regarding the past performance of securities or investment products, please note that such information is not a reliable indicator of future performance and should not be relied upon as a basis for investment decision. Past performance does not guarantee future performance and the value of investments and income from them can fall as well as rise. No investment strategy is without risk and markets influence investment performance. Investment markets and conditions can change rapidly, and investors may not get back the amount originally invested and may lose all of their investment.

Mutual Fund Investment are subject to market risks, read all scheme related documents carefully before?investing.