Top Financial Actions for someone in 20’s

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Top Financial Actions for someone in 20’s

Top financial actions for someone in 20s

There is a great amount of stuff to deal with if you are in your twenties, looking for a partner, or to giving a right direction to one’s career. If that’s not enough there is a huge amount of peer pressure to deal with in this dramatic age, flashing the latest gadget, visiting expensive restaurants and making holiday trips. Unfortunately savings and investments are not even in the list of priority. This simple do’s and don’ts can help someone set a right direction towards building a great financial portfolio.

Do’s

  • Understand inflation – This single most factor is the biggest wealth destroyer. At young age when time is on your side, not considering inflation can make time your biggest enemy. As definition inflation is the rate at which prices of general goods and services rise, which results in decrease of purchasing power of money. Simply put if you keep Rs 10000 in your bank today, after a year in spite of nominal interest accumulation the value of your money will go down because of inflation
After 15 years @10% simple interest After 15 years @10% compounding interest After 20 years @ 10% compounding interest
25 Lakhs 42 Lakhs 67 Lakhs
  • Understand the power of compounding – “Compound interest is the eighth wonder of the world. He, who understands it, earns it … he who doesn’t … pays it.”― Albert Einstein. This is what works when someone has time on his side. Compounding interest simply means that every year you earn not only on your original investment, but also on the interest accumulated over a period of time. Look at what happens to an investment of Rs 10 Lakhs. It’s interesting to note that one makes a profit of Rs 32 lakhs in first 15 years, but additional 5 years of time results in an additional profit of Rs 25 lakhs.
  • Create Financial Goals – To make sure that your money works for you, create goals for it. You have your career goals and targets; why not create the same for your investments? Goals give you a strong vision for your investments. Rather than looking to satisfying your needs today, look at how your investments will help you in future. Ask questions like what I will do with this FD when it matures after 3 years. As counter intuitive it may sound, start investing for your retirement.
  • Take risk management measures – Buy a health Insurance and a term insurance policy. No matter how much cover your company is providing, it pays to own an insurance policy. Don’t buy investment based policy for tax saving, or whatever returns are promised. Keep your investment and insurance separate and buy a pure risk policy.
  • Appoint an investment Advisor – A good advisor to your wealth is like a good coach to your health. A good advisor will not only help you to achieve more discipline but will also help you save (earn) on various taxation issues and other financial transaction. A good advisor talks about you more and less about the products.

Don’ts

  • Don’t invest in tips – “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” – Paul Samuelson. This quote says it all, take right investment decisions then only review and rebalance your portfolio. Too much churning and buying and selling on tips can only help you earn experience.
  • Don’t invest just to save tax – This in line with my above point, to invest with a goal in place. Generally people invest at the last moment in a product. All they care is if their colleagues have bought the same product and is it good enough to save some tax. But that will only help today, what happens when this investment matures. Other reasons people invest are – doing an FD just because money is lying in bank, buying an insurance policy due to pressure by a relative or bank RM. Create a goal before investing
  • Don’t follow the traditional mindset – India has traditionally seen high interest rates of more than 12% and a consistent return on gold due to rupee depreciation. Hence traditionally people start investing in deposits or buying gold. Once they reach a respectable corpus, they sell most of the portfolio and buy a property. 92% of India’s household saving is in deposits, currently which are yielding below inflation. Following these traditional methods are not relevant any more. The ideal way is to create an optimum asset allocation with higher portion allocated to equity and invest accordingly. It’s a proven fact that equity is the only asset class that can beat inflation.
  • Don’t take loans – Not all loans are bad, but if you are spending money on your credit cards and taking personal loans for buying gadgets or even a car, it is a big no. If you think taking an educational loan will help boost your career, surely go ahead. As legendary investor Warren Buffet said “If you buy things you don’t need, you will soon sell things you need.”
  • Don’t be lazy on your paperwork and taxes – If you are salaried then tax on your salary is deducted at source. But that paying tax is different from filing returns. Make sure you file your returns timely and accurately. You need to disclose any other income that you might have from interest or capital gains. Also make sure to keep your papers properly. Keep copies of all your insurance policies. Preserve health policy documents even after they have expired. Don’t keep your Pan card in wallet. Have a legitimate filing for every document and keep a soft copy in cloud storage for easy access.

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