Manish Jain, Financial Chronicle 1/8/12
What is the right age to start financial planning? Should I start at the time of getting my first job or should I wait till I have made a lot of money? These are common thoughts in everyone’s mind.
Frankly, there is no particular ‘right’ age to begin financial planning. The only adage that one must remember is that the more time you give your money, the more it will grow.
The ‘power of compounding’ works its magic only with time. So, the ideal time to start off is when you get your first job – in your 20s.The biggest asset that you bring to the table in your 20s is not how much you are earning, but the amount of time that you have on your side to make your money grow. The decisions and actions that you will take now will have a tremendous impact on your future. Sounds unbelievable, but it is true.
At this age, you will quite obviously not have a lot of goals (clearly visible) to achieve. This should not deter you from starting financial planning. All that you do, may not be goal-based financial planning, but, there is a lot of groundwork that you can do, so that as and when your goals become clearer, you are able to align them towards your financial wellness.
Let us look at some golden rules that young people must follow in order to have a secure financial future:
1. Open a Public Provident Fund (PPF) account at the earliest: With the limit of investment now being raised to Rs 1,00,000 per year, this is a good investment option as it offers steady (and not constant) returns. The returns from PPF are now linked to the market and will be revised annually. This can be used for tax planning.
2. Pay off your credit card debt: Rolling over your credit card outstanding is the worst thing that you can do. The compounding of the interest on your credit card outstanding is enemy number one. Use internal accruals as far as possible to pay off your credit card debt, immediately. Each day of delay is only going to cost you more. If you are unable to figure a way out, ask your financial planner for advice.
3. Use your credit card wisely: At this age, the tendency to splurge is immense. With little or no liabilities, one tends to spend beyond one’s income, all thanks to your credit card. The credit card is a useful tool, if used wisely. Unchecked spending can lead you to a debt trap.
4. Don’t rush to pay off your education loans: These provide you with a certain amount of tax benefit. So it is not wise to rush to pay them off immediately. Use the tax benefit to your advantage. Pay it off only if the equated monthly instalment (EMI) becomes a burden on your finances.
5. Get an emergency fund in place: This is nothing but putting away about four to six months of your expenses into a debt instrument to take care of any unforeseen expenses. The investment value of this amount should not fluctuate, but the returns should be optimal.
6. Buy life insurance if necessary: Generally speaking, there are no dependants at this age. You need to take life insurance cover only if there are people dependant on you and your income, or, if there is an asset (like a home) that you are purchasing by taking a housing loan.
7. Subscribe to health insurance: This is one cover that should be taken up immediately. It does not cost much at a young age, but provides security against unforeseen health-related expenditure.
8. Track your Cibil score: Thanks to technology, now your financial transactions (like credit card repayment and rollover, cheque bounces, non-payment of EMIs on various loans taken by you and delay in paying your liabilities, to name a few) are recorded and monitored by Credit Information Bureau (India), (Cibil). Your Cibil scores play a vital role in loan approvals in the future. So, if you spoil your rating at such a young age, you will find it hard to get loans in the future for your house or your child’s education.
If you can start off saving at a young age and plan your investments methodically, along with your financial planner, you can achieve all your dreams. The most important step is the first one because that decides whether you will create the path to your financial wellness or not. As Martin Luther King Jr puts it, “Take the first step in faith. You don’t have to see the whole staircase, just take the first step.”
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