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We will talk about why it is crucial to start the investment journey early and a few other essential factors to kickstart your financial journey as a young earner.

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Young earner? Here Is What You Should Do To Kickstart Your Financial Journey

Oct 16, 2020 (0) comment

Once our investment journey starts in the late 20s or early 30s, it strikes us that we have lost a few precious years to let the power of compounding play the magic with our money. And that is when the thought of ? not starting early’ becomes a regret.

We will talk about why it is crucial to start the investment journey early and a few other essential factors to kickstart your financial journey as a young earner.

First, let's understand, why is it essential to start investing early?

The key to wealth creation is starting your investments early. In fact, the sooner, the better. Look at the example below to understand how it works wonders.

Two brothers Akash (25) and Vikash (30) wish to invest Rs 15,000 every month in a SIP and keep investing till 55. So, the investment period for Akash would be 30 years and 25 for Vikash. Though there is no fixed return for SIPs, assuming the rate of return for the said investment is 12 percent, let’s calculate their final corpus.

Advantage of starting investments early
Age Investment Amount Investment Tenure Rate of Return Total Amount Invested Final Corpus
25 ?15,000 30 12 ?54 lakh ?5.29 crore
30 ?15,000 25 12 ?45 lakh ?2.55 crore

As per the calculations above, by starting the investment only five years earlier, Akash would earn more than double of Vikash’s corpus by just investing Rs 9 lakh more.

Hence, here is what Akash should do to manage his money more efficiently:

Make a budget 

The only way to make the ends meet and yet save a little money every month is streamlining expenses by creating a monthly budget for yourself. And creating a budget is a simple three-step formula. Here they are:

  1. Track your expenses for two to three months to find out how much you are spending on rent, food, utility bills, eating out, leisurely activities, etc.
  2. Allot a reasonable amount of money for each expense.
  3. Stick to it!

Also while making the budget, Akash can alloted a reasonable amount of money as savings/investments which is meant for the annual trip, car, and his wedding.

However, living on a budget does not come with a tag? no fun all. Akash should allot a reasonable allowance in his monthly budget for leisurely activities, but at the same time, ensure not to overdo it.

Define financial goals and start investing

Right now, Akash has three financial priorities: saving for an annual trip,  buying a car, and saving for a grand destination wedding. He can turn these priorities into financial goals? short term, mid-term, and long-term? and take a call on how much you need to save towards each goal.

Financial goals and its time-frame
Financial Goal Number of years
Short-term goals 0 to three years
Mid-term goals Three -five years
Long-term goals More than five years

As per the table above, saving for the annual trip would be a short term goal, for a car, it would be a mid-term goal, and saving for the destination wedding would be a long term goal.

Short term goal

Now when it comes to investing for short term goals, Liquid Funds are ideal. Liquid Funds are the safest funds in the mutual fund category as they lend to highly-rated corporates for a very short duration. This ensures the risks are kept minimal. So for saving for the annual trip, Akash can take a call about what kind of money he wants to spend on the trip, and invest accordingly in liquid funds.

Mid-term goal

For a midterm goal like buying a car, Akash can invest in Aggressive hybrid funds. For these funds, around 65-80 percent of the money is inequity and the remaining in debt. Small exposure to debt securities helps to stabilize equity volatility. So, they are best for new investors

Long term goal

Presumably, Akash won’t get married in another five years, so saving for his destination wedding is a long-term goal. For goals that are at least five years away, one should be investing in Equity Mutual Funds. While there are a lot of fund categories, as a beginner, Akash should stick to large-cap funds or multi-cap funds.

If Akash includes these 2 simple practices in his day-to-day financial activities, he can save sufficiently towards his goals even after meeting all his monthly expenses. And that too, without compromising much on his lifestyle. But before we conclude on this topic, there are two other things that young earners shouldn’t avoid, neither should Akash.

Two things you should not avoid as a young earner

First, is insurance? health and term.  Having personal health insurance will ensure you don’t have to spend from your pocket in case there is a medical emergency. Meanwhile, term insurance is a pure life cover. It will cover the financial requirement of your family in case you were to die an untimely death. Plus, the earlier you buy them, the cheaper they are.

The second crucial factor is building an emergency fund. This fund is created to meet urgent or unforeseen expenses, which should be about three to six months of one’s expenses. It will ensure that one doesn’t have to dip into his/her savings in case of an emergency.

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