For many of us, our 20s start with graduating fresh out of college with a low-paying job. Thinking about saving and investing is put off for 'later in life'. However, you don't have to start with heavy investments and diversifying your portfolio right now. Here are a few money-making moves that you can achieve by the time you're 25 by saving as well as investing.
1. Save up to 20% of Your Monthly Income
The start of your career is also the best time to make any financial mistakes because you have a lot more time to recover from them. And how do you do that? By having a cushion to fall back on. This money cushion can be your saviour on a rainy day. And how do you keep your financial health cosy with it? By saving between 10% and 20% of your monthly income in a separate account. Here's a little tip-don't keep the debit card of this account on your person. This will stop you from using the money in this account.
A good rule of thumb to follow here is to have at least 3-6 months' salary as an 'emergency fund'. It can be useful for any financial crunch, including if you were to make a poor financial investment.
2. Budget Your Expenses with Budget Tracking Apps
Track your everyday expenses and make cuts accordingly. You don't need to sit with a paper and pen or a spreadsheet and manually track anything. In this digital day and age, you can use an app for basically anything. Download a budget tracking app, set your budgets for various expenses and track how much you spend in each of those. This will give you a good outlook on your frivolous and excess spends that can otherwise be saved to build your emergency or raise investment capital.
3. Open a Recurring Deposit Account
Opening a recurring deposit (RD) account in your early 20s is the equivalent of opening a piggy bank in your childhood. It allows you the freedom to choose any amount that you can afford to put aside each month into the account. As the name suggests, you make recurring payments on a monthly basis up to the chosen tenure-6 months to 10 years. At the end of it, you will earn interest on the amount deposited.
Here, you might wonder, why not just leave the money in your savings account because that will earn interest too, right? The reason it's wiser to put your money in an RD account instead is that you will earn more interest than a regular savings account. Savings accounts usually earn interest between 3.5% and 4% p.a. whereas RDs can earn from 7% to even above 8% p.a. That's almost twice as much or more. This is a great way to start your investment because investing in a recurring deposit account is low risk and provides guaranteed returns.
4. Invest in Fixed Deposits
Say you've just come into some money and you're wondering if you should open another savings account and let it sit in there for the foreseeable future. How about instead opening a fixed deposit (FD) account? Since you're still a novice when it comes to handling finances and you don't know when you'll need additional funds to cover sudden expenses, you could consider opening an FD account.
Unlike an RD account, you put in a fixed amount of money into an FD account for a specific tenure and once again earn better interest than a savings account upon maturity. You can open an FD account with tenures as short as 45 days (with interest rates starting from 6% p.a) or as long as 10 years (with interest rates ranging around 7.5%). A great feature of most FDs is that they come with automatic renewal. So. if you don't find a use for the money upon maturity, it will automatically be renewed for the same tenure.
5. Consider a Mutual Fund Investment
At this point, you might be wondering, mutual fund investment before you're even 25, on a meagre income? How is that a wise decision without even familiarising yourself with the financial market? Here's a little something about mutual funds that may excite you-you don't need to be a financial expert to invest in them. You don't make the decision of where the money is invested. And what's better, you can now invest in a mutual fund with as little as Rs.500!
You can also invest in an Equity Linked Savings Schemes (ELSS) that come with a lock-in period of 3 years and allow you to claim income tax benefits up to Rs.46,800 every year under Section 80C of I-T Act. At the end of 3 years, this investment could serve as a down payment on your car or even fund a trip to Europe!
This is also a great way to beat inflation. For example, RDs and FDs have low risk, but the returns are also lower, but returns on mutual funds can beat the rate of inflation in the long run.
6. Think Long-Term Saving With PPF
Another safety-net instrument is the Public Provident Fund (PPF). These investments are guaranteed by the government of India with attractive interest rates (usually above 7% p.a.) and these rates are compounded on an annual basis. You can open this account with a minimum of Rs 500 and a maximum of Rs 1.5 lakh per year. The investment will be locked in for a period of 15 years which can be further extended.
So, opening a PPF account in your 20s is a perfect way to kick-in your retirement planning because you can keep extending it in blocks of 5 years until you make enough to live off it. Or if you choose to withdraw it after 15 years, you could even use it as a down payment to buy a house!
If you're stepping into the big, bad world, then you need to turn into the big, bad wolf of money-making decisions. These steps can be useful in your chase to accomplishing your short and long-term financial goals.
(The writer is CEO, Bankbazaar.com)