Proper financial planning helps meet your life’s goals. A financial plan serves you as a guide that helps manage your money matters and accomplish your financial goals.
Despite the importance of financial planning in day-to-day life, it is not being taught during school or college education. Thus, many youngsters remain clueless in managing their money.
Managing finances does not require being outstanding in math’s, all you need is the willingness to create wealth and a fair understanding of money management.
Financial Planning Lessons for Young Adults
To better manage your finances in your 20’s, you need to learn some key aspects of financial planning. Let’s have a look at five important aspects that help understand in managing your money.
1. Understand Savings and Investment
Mahesh Sharma, aged 25 years started earning from the last 2 years. He saves a good proportion of the amount from his salary. He usually keeps his savings in a bank account and invests money in fixed deposits. Mahesh believes that these savings are enough to secure his future. So, where is he missing out in planning finances?
Here, Mahesh is not able to differentiate between Savings and Investment.
When you start earning, you always want to save for your future needs. Savings is an essential aspect of financial planning. But putting your savings only in your bank account or investing in bank fixed/recurring deposits will yield low returns. It keeps your money safe, but will not be able to achieve financial goals in the long run.
Making investments with financial instruments such as equity, mutual fund, PPF, NSC, SSY, real estate, etc., offer higher returns and help you achieve financial goals. Mahesh can choose from top investment options that offer higher returns and help him achieve financial goals. Also, he should review his investment periodically to ensure these are in sync with his investment preferences and goals.
2. Manage your Financial Risk
Financial Risk Management helps reduce financial losses and it’s an essential step in financial planning. When it comes to managing your financial risk, you must choose to buy insurance.
To ensure the financial security of the family, you should pick a life insurance policy. A term life insurance policy is a must buy, as it assures financial guard for your family & loved ones, after your unfortunate demise. With an annual premium of Rs. 5018, you can get the life cover of Rs. 50 lakh.
You must also get health insurance, so you need not worry about medical expenses in event of hospitalization. Likewise, you can get your assets insured such as home, car, bike, etc. With an annual premium of Rs. 8,651, you can get a family health cover of Rs. 5 lakh.
(Note: The premium amount specified above may differ from one insurer to another)
3. Maintain Contingency Fund
A contingency or emergency fund works as a financial cushion at the time of financial emergencies like job loss, hospitalization, etc. This fund should cover your entire family’s expenses for about 8 to 12 months. A contingency fund should be low-risk and easy to liquidate like a bank fixed deposit, savings account.
4. Identify Financial Goals
Before start investing, you need to determine your financial goals. You need to list your goals like your marriage, having a child, buying a home, high education for your child, your retirement planning, etc. All these are your financial goals and you need to ensure that you can achieve these goals.
5. Start Investing
Now you have your goals in hand, it’s time to begin investing. You can start making regular contributions for various asset classes such as equities, fixed Income, commodities, financial derivatives, real estate, and money market instruments.
It helps you get a habit of investing in a regular and disciplined way. SIP investment is one of the best financial instruments for young adults that help them to build wealth.
Getting into the habit of financial discipline is vital to have proper financial planning for young adults. In their first job, youth have a feeling of financial independence and they mostly spend their whole earnings in their lavish lifestyle.
But you need to save money from your earnings and invest it to meet financial goals. Financial Planning is to secure an Unsecure Tomorrow.