This post has been written by Pardeep Goyal, founder of Cashoverflow
It is the mid-20s when most of us start earning either through a job or personal business. This is the phase when you slowly start coming out of the financial dependency of parents and aspire to fulfill dreams. You need to be financially prudent to meet all your needs and secure your future.
If you start planning your finances before you enter your 30s, you can start your journey of wealth creation and be ready to face any challenges of life in a better way.
Here are 10 personal finance lessons that you can follow to manage your finances to achieve your goals in life.
#1. My Simple Formula
I follow a simple but effective formula to save money.
Earning – Savings = Spending + Investment
Meaning, save money before spending.
But what most people do?
Earning – Spendings = Savings + Investment
Meaning, they spend money first before saving or investing.
After expenditures, they are left with a big ZERO.
And, this is a never-ending loop.
The message is clear & loud. No one can save without discipline.
If your monthly income is Rs. 30,000/-, then save at least 10% beforehand. When you start earning Rs. 50,000 increase the saving percentage to 15%.
Increase your savings percentage every year. Challenge yourself if you can save 20%, 30% or 50% of your income?
You will bless me for this advice as you may never need to look up to the bank for any loans in life.
#2. Prioritize Everything
You should prioritize everything in your life based on your aspirations and future goals. You can’t do everything at the same time.
1. If you need money in the short-term period then invest in short-term investments like FD, and you will get some returns as well without worrying about market fluctuations.
2. You can invest in mutual funds and stocks if you don’t need money for the next 5-6 years.
3. Do you have any big expenses in the coming 2-3 years? Like your marriage or sister/brother’s marriage? Not only marriage, you may also have plans for higher studies, or you are planning for a big vacation abroad or planning for a child?
Prioritize everything and then invest as per your priority.
#3. Goal-based savings
Set a goal and be disciplined in savings to meet that goal.
Goals can be marriage, child’s education, foreign vacation or small things like furniture or LED TV.
Define the goal amount and divide goal amount with the number of months to reach the goal.
For example, if your goal is Rs. 48,000 to buy a new motorbike in 12 months then you have to save Rs. 4000 every month (you will save a little more as you will earn some interest as well).
#4. Learn the basics of investing
Do you know the difference between simple interest and compound interest?
If no, then you have to learn the basics of investing money. You should know the importance of short-term investments and long-term investments.
Take decisions based on your future expenses projections.
Don’t give your money to someone to invest on your behalf. Take control of your own money. Know your risk appetite and start investing accordingly.
#5. Buy Health Insurance
You simply cannot ignore the possibility of a medical emergency. It is better to have good health insurance for you and your family.
I know, your company provides you medical insurance. But, be careful here as it becomes void that moment you leave your job and to avail benefits in the new job, there’s always a waiting period. Unfortunately, the emergency doesn’t wait.
It would be better to first understand the requirements for health insurance like coverage, people to cover and then choose the right health insurance as per your specified requirements.
#6. Multiple Income Streams
The majority of people just think about multiple incomes but never do anything to create a second source of income.
I hope you aren’t banking on the income of your future life partner.
I am talking about ‘your money’ working for you through investments.
Invest in yourself. Build a skill which is sellable online. It can be graphic design, music, teaching, software development, or writing.
Become a part-time tutor. Start teaching for one hour daily. It is an opportunity to learn new things and build your reputation.
Become a consultant. You can consult other people for marketing, investing or career, and make extra money.
Invest in high dividend-paying stocks. Only if you have a good understanding of the stock market.
#7. Spend on things you really need
I have seen people spending a huge amount to buy the latest iPhone that too when the existing phone is working amazingly well.
This happens because marketing companies make us (and our products) feel inferior. This is a marketing gimmick to sell you something you don’t require.
You must be aware of your needs and desires.
#8. Emergency Fund
Uncertainty is a reality of life. Everyone has to go through unexpected events. So, it is of the utmost importance to have an emergency fund ready to meet all exigencies.
Whatever is your income, set up an emergency fund. An emergency fund gives you the much-needed confidence to face challenges.
But, the need of the hour shouldn’t be buying something for leisure using the emergency fund.
Plan your emergency fund in such a way that if you lose your primary source of income, you could still survive for at least 6 months.
#9. Stay within your budget
You might have noticed that there are multiple unexpected expenses (forgotten expenses) that come every month and you spend money over the budget.
Sometimes it’s shopping for cousin’s marriage, or car insurance premium. How to deal with such expenses?
Calculate all expected expenses and keep some money in the buffer for unexpected funds. You can use an excel sheet for ease. Plan your budget and pay accordingly, no matter what.
#10. Make Credit card your Buddy
Last year, I saved more than 1 lakh rupees from credit cards by using the right card at the right place.
This can be possible for you only if you use a credit card wisely. Credit cards come with different offers like sign up bonus points & rewards. You get discounts & deals on various websites, travel, hotels, and shopping.
Now it’s your responsibility to use credit card within the limit of what you can pay from your salary and always pay the credit card bill to enjoy several benefits, otherwise, high-interest rates on overdue will make it your worst enemy.
In a nutshell,
You can follow these 10 golden rules in your financial planning. It is all about starting the planning and maintaining the momentum. Take the first step out. If you start financial planning early, you are definitely going to lead a better life ahead.