How should young earners plan their finances?

In his mid-20s, Kushal started working as an architect two years ago. He dreams of owning a car in two years’ time, a house by the time he is in his mid-30s, foreign holidays with family, an affluent lifestyle and early retirement. However, he has no idea how he should go about turning his dreams into reality. He doesn’t know how much to save and where to invest. He pretty much spends all that he earns. He wants to start planning for himself, but he does not know where to start.

Kushal needs a step-by-step plan to put his finances in order, so that he can meet his financial goals. He needs to start with budgeting. The exercise will tell him what his income and expenses are. By analysing the figures over 3-4 months, he will get a clear picture about his spending habits. This will allow him to cut down on unnecessary expenditure, leaving him with a monthly surplus.

It is this surplus that he must save. He has to set aside a percentage of his monthly income as saving. Before saving for wealth creation, he must build an emergency corpus big enough to cover three to six months’ expenses. Such funds must be invested in highly liquid options, so that they can be withdrawn without fuss.

Kushal needs to categorise his goals into short-term, medium-term and long-term. While determining the amount for each goal, he must factor in the impact of inflation. The price of the car might increase in two years, as will that of his dream house in 10 years and those foreign holidays. Else, he will not be able to save enough. Categorising will tell him how much he will need and in how many years. He will have to align his investment options with the timing of his goals.

As a rule of thumb, Kushal should stick to debt for the short term, equity for long-term and blend of debt-equity for the medium-term goals. He must consider his risk appetite, time horizon and liquidity, rate of return and taxation while choosing suitable investment options. Along with wealth creation and investments, Kushal must take insurance or risk-coverage. To start with, he must take an accident disability plan and a health insurance policy. He may not need a life insurance term plan unless he has any dependents.

While his financial goals will undergo changes as Kushal’s life evolves, budgeting, setting goals, investment, insurance and taxation form the cornerstones of his first financial plan. His first financial plan will propel him into a saving habit and wealth creation, thus ensuring that his financial goals are duly met.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta)