Managing personal finances in your 20s

Managing personal finances in your 20s

?For many of us who are not financially literate, worrying about money, investing, & saving for the future can be an overwhelming chore. After all, we're not limitlessly rich—money & time-wise.

As personal finance was never a part of our school curriculum, it led to a huge knowledge gap. With that in mind, we're taking this one step ahead & writing this article about managing personal finances in the most simplified way possible, which will not only help you in your journey towards financial freedom but will also help you in getting a hold of your life.

We'll walk you through the basics of personal finance—budgeting, spending, saving, & investing.

Finance isn't just about company deals & economic policies, but it is also about managing your own money.

?So let's begin with budgeting

?A budget is a financial plan that allocates future income towards expenses, savings, & debt repayment. So, it's basically saying that you're only going to spend X amount of money in different categories each month. But once you're aware of your income & expenses, it can be a little intimidating to figure out where to assign different amounts of money. For that, there's a very great rule called the 50/30/20 rule to get you started on how to divide up your money.

?So, you take your income and divide it quickly. 50% of your income should be spent on things that are "Essential", like your rent, groceries, transportation, utilities, etc.

?Now that's out of the way, so 30% should be spent on the things that are "Non-essential" because you need to have fun in your life too—going to the movies, eating out, shopping at your favourite fashion store, etc. In case you're running low on cash here, then you just have until your next salary.

?And finally, imagine how you want your life to be in the future. You may want to retire early, or you may want to buy that dream house. With so many goals in mind, how does one get there if they don't save and invest? Well, 20% of our income goes towards that "Future You".

?By deploying this simple rule, you're taking care of yourself today and your future.

?Spending & keeping track of your expenses

A lot of people in their 20s have this narrative about needing to live your life to the fullest & they equate this with spending a lot of money on things that you can actually afford on short-term pleasure and then spending it all, but one should understand that it's at the cost of your own future. It's really important to think about your future goals like where you want to be, how you want to be living and all those things because the decisions that you make now financially will really affect you in the future, and that means delaying some of that instant gratification we look for.

There are a plethora of resources out there that helps you in tracking your money, like YNAB, it is an application where you have to input all of your expenses as you spend, which ultimately forces you to be very mindful of where your money is going. Few other examples of such resources are IND Money, Tiller Money, Mint, Expensify, etc.

When it comes to tracking your money, checking your credit card & bank statements can also help you identify where you're spending. But be careful of using credit cards, make sure you do not spend more than what you have.

Even though credit cards should always be one's last resort, but you can also enjoy some benefits by making your credit score work for you as these scores allow a financial institution to check your reliability for paying off the debt.

Savings

● It's very crucial to have an emergency fund because you never know what's going to happen in the future. Starting off with a 1-month salary then 3 months & finally 6 months’ salary is highly recommended, it's for the times you're not generating income.

● it’s highly suggested to have a retirement plan, your future self will thank you for it. The younger you start preparing for your retirement the better. So have a retirement account, and start investing as early as possible so that you can enjoy the benefit of compounding as you stay invested longer.

● Set short-term & long-term goals, such as travelling, buying a house, or making a splurge. When you have that idea planted in your head as a young person, it's going to make a big difference in the way you view your finances & the way you spend money day today.

● Build a savings cushion when you do get paid to insulate you from times you're not generating much income, which provides security for your family in the event of a disaster.

● Reduce discretionary spending- these are the expenses that are not really essential, and it covers most of your luxuries. Determine which non-essentials, such as entertainment or dining out, you can cut back on.

We really love this quote by Warren Buffett that says, "Don't save what is left after spending, but spend what is left after saving."

Investing

For many people, income equates to salary, but this definition can hold you back as there are multiple income streams & investing is one of them.

In order to minimize your risk & potentially increase your gains, you need to own a diversified portfolio because there will be times when some of your investments will lose money. And when that occurs, you need other investments to offset the loss.

So, there are various asset classes from where you can start off your investment journey, such as stocks, mutual funds, gold bonds, real estate & cryptocurrency. And one should always invest in those assets which have a higher return rate than the present inflation rate.

● A stock is an investment that represents a share in a company. Suppose you buy a stock of any company & if that company grows, your stock is going to grow slowly with that company.

Studies show that more US people invest in Indian companies than our own country's people, and the reason behind this is that US people are more financially literate than us. Ergo, investing in top Indian companies can be a good decision. The earlier you start investing, the better it is.

● Investing in Mutual Funds can be an excellent option for a beginner as it equips you with owning a diversified investment portfolio which makes it a moderate to low risk asset class. These mutual funds are formed by asset management companies (AMC) which collects money from several individual investors with common investment objectives. A finance professional manages such pooled investment by purchasing securities such as stocks & bonds.

● Gold bonds are equivalent to buying gold, but one does not get it in physical form. So, you don't have to worry about keeping the gold safe from mischievous eyes. They are certificates issued by RBI under the government of India. So they can be purchased by the public & can be used as collateral for loans, investments, etc.

● Crypto currency is a digital currency that works on block chain technology & is designed to work as a medium of exchange to buy goods & services. And it's unique in a way that it's decentralized & free from any third-party interference, which means it is not issued by the government or central authority.

Most crypto educators & social media influencers in this era only scratch the surface of such topics and are keeping up the crypto hype to unimaginable degrees. It's very difficult to understand crypto currencies, block chain, mining, & other concepts. That's where crypto educators are stepping in by presenting the facts in a manner that makes these assets seem valuable & extremely easy, that gives the illusion to the content consumer that they have complete knowledge of the workings behind crypto currencies.

While investing in crypto an asset is risky, but it can also be potentially extremely profitable. So you can think of investing a small chunk of your money in crypto currency as an experiment.