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Financial planning tips: Do's and don'ts when you are in your 20s

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You have just started to earn and needless to say, you may have more disposable investment income than people have in their 30s or 40s.

Financial planning tips: Do's and don'ts when you are in your 20s
Authored by Saumya Shah
You have just started to earn and needless to say, you may have more disposable investment income than people have in their 30s or 40s. This is the best time to cultivate constructive saving habits and carefully plan your future.
Here are a few tips you should keep in mind and mistakes you should avoid:
Dos-
Start Early-
20s is probably the best time when you can start to plan for your future. You freshly got a new job, which is paying you well and in order to have enough money for your needs and desires in future, you should commit to regular savings and investments to build a sizable corpus. The earlier you start, the more risk you can take and potentially earn higher returns and also you can benefit from the effect of compounding.
To understand the benefit of starting early and the power of compounding, let us see an example:
Risk Diversification
You should not put all your eggs in one basket, so diversification is crucial. Here, you need to understand that diversification across different asset classes is important but you also need to make sure that you have diversification across different risk factors. So, you should have asset classes with different risk profiles.
For example, historically we have seen that gold performs well when the equity market performs badly and vice versa, so it is advisable to have exposure to both. To have a diversified portfolio you can have a mix of investments of debt, equity, gold, real estate and commodities but you need to make sure that you don’t over diversify. For example, if you need more exposure to large cap, you can have a higher exposure to it but you don’t need to invest in 4-5 different large cap funds.
Build an Emergency Fund
An emergency fund provides a safety net for you and your family and should be given high priority. The future is unpredictable, so one should have enough liquidity to meet emergency expenses or any contingency that arises. Liquid funds are a good avenue to park your funds as these provide high liquidity and a better return than savings A/c.
Investing in liquid funds is even more attractive with Tarrakki Zyaada. With your Tarrakki Zyaada investment, you will get a Nippon Anytime Money Card, in partnership with HDFC Bank and Visa. This card enables you to use the money you have invested, should you want to, anytime. Tarrakki Zyaada combines the power of investing with convenient spending.
Generally, it is considered that you should have at least 6 months of expenses invested in liquid assets. Moreover, medical expenses are increasing at a very fast pace, which makes having adequate health insurance important. You should buy insurance when you’re young as the better your health profile, the lower the premiums you will have to pay.
Define your goals
After an emergency fund, you should ask yourself a few questions related to how much would you need for retirement? How much would you need for a house/car you have planned to buy? Saving without a milestone in mind is like wearing a N95 mask on your chin. If clueless, you should consult a Registered Investment Advisor. Having concrete goals gives you extra motivation to continue investing. Once you have defined your goals, you should make sure that your financial goals/ objectives are aligned with the investments you have made.
Tax Management
To legally save taxes is your fundamental right and something every salaried person should have knowledge of. Some people are very bad at managing their taxes and as a result, lose a lot of money as taxes which can be saved through tax deductibles. For salaried people, it is a must to manage taxes. They need to make sure they know about all the deductibles offered under section 80c and 80d such as ELSS, NPS, PPF, interest deductible on the first home loan, children’s tuition fees etc.
It is advisable to save your money under ELSS for tax benefits and capital appreciation as they provide a good rate of return. PPF and NPS are good alternatives with a lower rate of return and a longer lock-in period but these are safer investment avenues. This is how some of the Top AMC’s have performed recently
Scheme1Y3Y5Y
Mirae Tax saver fund17%10.79%N/A
Axis long term equity fund15.38%12.19%13.92%
Canara Robeco Equity tax saver fund20.2%12.25%13.01%
Research and analysis
Make sure that you do thorough research and analysis before investing your money. Good research can bless you with good returns, whereas investing without adequate analysis can result in you losing your money or paying hefty charges. Investment is not everyone’s forte, so there are investment advisors whom you can seek help from. Also, if you don’t want to directly invest in securities, you can invest in mutual funds.
Mutual funds pool in money from investors and help investors earn returns based on the investment objective of the fund. There are professionals who invest from mutual funds on your behalf. So mutual funds are advisable for those who don’t have adequate expertise. Also, with apps like Tarrakki, it is super easy to invest in mutual funds. Look for an app/advisor who provides investments in direct mutual fund plans and not regular plans. Regular plans have a higher expense ratio; hence they can eat your returns as they pay commissions to your distributor from your pocket.
SIP vs Lumpsum
Whenever you are investing in a mutual fund, make sure to go through a route of systematic investment planning and not investing the money in a lumpsum manner. SIP gives the investor the benefit of rupee cost averaging. So basically, you get more units when the market price is low and fewer units when the market price is high, and hence you will not have to time the market.
Don’ts
Debt Trap
The thing that you want to have, that desire to buy something can lead you to maxing credit cards. Surely, it gives you short-term leisure but in the long term credit cards are the root of debt for many millennials. Maintain your lifestyle as if you don’t have to use a credit card. It is hard to crawl out of a debt trap. You should not take excessive loans to create assets or to just have a luxury lifestyle. You pay a lot higher for an asset if you calculate the interest amount charged on the loan.
Even if it is a 0 interest loan, make sure to estimate all the additional charges levied as processing fees. It is advisable to completely avoid debt especially for depreciable assets like automobiles, electronics, etc. Having said that you can go for home loans considering the tax benefits attached to it as well as nature of asset.
Not tracking your money
Not tracking expenditure and thinking you are wise enough to manage your finances is a misconception, people often fall to. Keep a record of even your tiniest expenditure. This gives you the ability to avoid spending where it’s not needed. Be it a travel receipt or a lunch bill- needs to be recorded. Write all your expenses in a dairy or install an app. Budgeting is something every person should do and it helps you to understand your finances better. It can also help you understand how much you can save and invest and how much is your risk-taking capacity.
Don’t try to time the market
You should never try to time the market unless and until you have immense knowledge about the market. The market is really volatile and you can lose money trying to time the market. It is for the same reason that people encourage SIPs over lump sum investment in mutual funds.
Behavioural bias
You need to have a lot of patience when you invest in the stock market or if you invest for a long-time horizon. Whenever the market goes down, you should not start selling off all your shares in worry and if the market goes up a little you should not sell your share for a small profit. You should always stay invested for a long time, not follow the herd mentality and avoid playing by mere emotions if you want to earn a higher rate of return.
We saw that the market crashed in March-April this year due to COVID-19 and the equity market has been volatile throughout the year. On March 12, 2020 the Sensex fell by 8.2 percent and it caused a panic in the market. Worried investors started selling in the worry of the market falling further. Since that day, Sensex has gone up by more than 10,000. It shows that the market corrects itself over time and you just need to be patient and see through the ups and downs of the market.
Neglecting credit score
Credit scores are essential but are rarely given importance by people. One should maintain a good credit score by paying installments on time and paying back all dues. A good credit score means acquiring loans easily and at a lower rate.
Regular plans vs direct plans
If you invest in mutual funds, make sure you invest in direct plans only and not regular plans. Regular plans are what you buy through intermediaries like brokers, financial advisors. These plans involve the commission of the intermediary, which you end up bearing on yourself. Instead buy direct plans, where the expense ratio is always lower because these plans are bought directly from the AMC and no hidden costs or commissions are involved. If you plan to buy a direct plan, do consult a fee-based advisor who can help you construct an investment portfolio.
To conclude, we can say that early you start the better position you have. Remember, in mutual funds, one size may not fit all. Thus, your investment plans should be personalized and customized to your profile and should not be replicated from your colleagues.
Saumya Shah is the Founder of Tarrakki.com, providing comprehensive wealth management solutions. Views are personal
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