Money Matters: Personal Financial Tip For Young Adults
Rajeev Sharma
September 5, 2023. 4 minute Read
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In this article We’ll go through a wide range of personal financial tips that young adults can adapt for special opportunities and challenges that young adults experience.
- Table of Content
- 8 Personal Financial Tips for Young Adults.
- Final Thoughts
Today youngsters are very knowledgeable when it comes to their career, trade or profession. It’s common these days to find young professionals doing several courses and certifications while doing a full-time job and some even do side hustles.
However, when it comes to managing their finances, several of them still rely on friends, relatives and parent’s advice.
As aspirations are different, times are different, the advice and goals mismatch, resulting in financially weak households in the future.
As an example, if one listens to the older generation and only does FD their whole life it will be tough to beat even inflation as FD gives us returns less than 7% while inflation in medical and education is more than 10-15%.
Therefore, it is very important to have a basic understanding of personal finance which can enable a person to make his customized financial goals and achieve it too and make the family financially stable and strong.
Following are some of the areas or strategies where one can ponder on to make their financial health strong and stable.
8 Personal Financial Tips for Young Adults.
1. Aim for Strong financial foundation (SFF)
A strong financial foundation enables a person to stop living paycheck to paycheck, avoid debt or pay off old debt and begin his or her wealth creation journey in a planned way.
Once you have built SFF, you have the financial strength to face situations like a bad job, bad relationship, medical emergency, job loss etc.
One can even take a sabbatical or a long break without worry of paying the next month’s bills. Following are some of the basics to start with in order to attain SFF.
a. Set Financial Goals
A strong financial foundation enables a person to stop living paycheck to paycheck, avoid debt or pay off old debt and begin his or her wealth creation journey in a planned way.
Once you have built SFF, you have the financial strength to face situations like a bad job, bad relationship, medical emergency, job loss etc.
One can even take a sabbatical or a long break without worry of paying the next month’s bills. Following are some of the basics to start with in order to attain SFF.
b. Prepare a Financial Budget
It is a good practice to prepare a monthly budget and track if you are following it each month. If the expenses over shoot, take appropriate measures in subsequent months to keep it on track.
The budget can be flexible as per your income growth.
c. Investments
With the money you save, don’t just keep it accumulating in savings accounts or FD or the basic 80C investments, but diversify to equity funds, bonds, PPF, NPS etc.
Objective should be to earn higher and sustainable returns. More on this latter in the article.
2. Focus on Earnings than Savings
You read it right, typical finance advice starts with saving 80-90% of your earnings, however there is a limit to which you can save in initial years of your career, but if your focus is on your career, your earnings in initial years can grow much more, even 500% in 5-6 years.
One can find opportunities abroad too to increase earnings or learn new skills by doing some courses or certifications to enrich their careers.
One can also learn new skills to start some side hustles which will go a long way to boost an individual’s income.
Blogging, making you tube videos are quite popular these days and can be monetized at a later stage once the subscriber base grows.
3. Prepare Saving Strategies
One should try to save maximum from the first day but not at the cost of spending on career-oriented value addition and learning new things.
In initial years even if you don’t save much due to expense on some courses which will help in your career it is worth doing it.
The famous investor Warren Buffet puts it as
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The best investment is investing in yourself
As you progress in your career (in 4-5 years) your earnings will substantially increase (may be 2x to 4x of your first pay cheque) and therefore now priority should be on savings.
Savings or investments should be done beforehand and not wait for the leftover money after spending on your needs and wants.
If you understand this equation (given below) well it would transform your financial life. Savings should be understood mentally as a critical outgo or expense which cannot be compromised.
In simple words as soon as your salary is credited you should first invest in the form of automated SIP and then spend from the leftover amount.
Spending = Earning-Saving
Some of the common strategies for savings may include the following:
- Home cooked food keeps you healthy and also wealthy
- Avoid high ticket purchases in initial few years of your career like Car, fancy bike, latest Iphone, exotic holiday etc
- Don’t worry about owning your home in initial years, a rented house is your friend.But don't follow the advice of always staying on rent.
- Keep a watch on your weekend purchases and spendings.
However, one shouldn’t overkill on this strategy as it should be adopted as per personal aspiration and likes.
The journey should be pleasant therefore one should be flexible enough to enjoy milestones and treat themselves occasionally.
4. Insurance is a Must
Initial earning years are the right time to take term life insurance as it is cheap and most of the people are in good health.
The premium also comes very low at a young age. You can keep increasing the term insurance as your income goes higher.
Most of the employees have medical cover from Employers but it is advisable to keep a separate medical policy as corporate medical policy will be limited to a certain amount and these days hospitals are very expensive.
Furthermore, it would help when you are transitioning to a new job and in cases where your new employer is not providing you adequate insurance cover.
5. Create a Emergency Fund
Ideally one should keep six months to one year of expenses in an emergency fund. You can build it slowly and can be in the form of RD or FD.
This would help in emergencies like medical, job loss, Covid like situations etc.
Without an emergency fund in initial years, a person may have to take debt in emergency situations which can even derail financial goals.
6. Learn basics of Investments
Investing style depends on an individual and can differ, however following basic points can help in devising your own investing plan.
a. Short term
Broadly make two buckets after you have saved for emergency funds. The money which you may need in less than 4-5 years to invest in debt products like debt mutual funds, FD, bonds etc which are relatively secure.
b. Long term
Money which is not required in the next five years can be allocated in equity products like equity mutual funds, stocks, Hybrid funds etc.
For beginners, index funds (Nifty 50 or Nifty next fifty) are good to go, avoiding directly investing in stocks. One can also put money in these buckets in the form of SIP each month as you get your salary and in lump sum when you receive yearly bonus or when market has corrected substantially.
c. Diversify your Investments
It is better to diversify your investments to mitigate risk. A diversified portfolio provides stability and helps achieve financial goals smoothly.
So investment in several asset class such as Equity, Debt, Gold, Real Estate etc
d. Each penny counts
Don’t wait for a large sum to be invested. One can start with a small amount every month in the form of SIP in mutual funds or RD. If you keep on increasing this small amount every few months, this would do wonders to your wealth in 10-15 years.
7. Learn Basics of Taxation
One should take interest in learning basic taxation and on investments where one can save taxes.
Few of the common tax saving advice can be
- Investing in PPF as you get relief on 80C and also on withdrawals if held for more than 5 years.
- If your Employer allows you to increase your contribution in EPF, you can opt for it as you would get high return and no taxes on withdrawal if held for more than five years.
- For long duration investments equity products attract lower tax as compared to debt products. Furthermore, if you are in a high tax bracket, equity investment can be the tax friendly strategy.
8. Gain Financial Independence
Financial Independence is popular these days and many young people want to achieve it quickly, however one needs to understand it in depth and then make a decision.
It is a long journey of dedication and discipline therefore don’t go by the popular YouTube channels advocating it.
It takes a long time except for a few who are lucky with very high initial earnings or a jackpot in their investments. Ideally one should target SFF as the first step and then target Financial Independence.
Final Thoughts
A person works very hard to reach a respectable position in the corporate world. The earnings are bound to go higher for a person who has studied and worked diligently.
However, are all of them rich or SFF or financially independent after maybe 10 to 20 years of working career?
The answer is definitely not yes for several cases. In fact, as per some of the studies several of us are still living paycheck to paycheck even after say 10 years of service.
If one follows the above points in the article, probability is high to attain SFF and in some cases even financial independence.
A person or household with SFF lives without anxiety and fear at least on the financial front which is a great thing to have.
It lets you enjoy your life without fear of the future uncertainty and also achieve your goals smoothly as per your plan.
Furthermore, SFF enables a person to take risks in career or business and achieve higher goals in life.
Looking at the benefits of SFF, one should definitely try the above strategies and tips and in the process break the shackles of living paycheck to paycheck.
However, one should be cautious that the above strategies are not some quick tricks which would give results in a few months or years.
This may take more than a decade of following your financial plan with discipline and without much deviation.
So are you ready for SFF and take the challenge?
Disclaimer: This article is for educational purpose only and is not investment advice. You may please contact your financial adviser or certified financial planner to decide on your portfolio or investments.
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