You obviously view this period as being an adventurous one where you can experiment and blow up your earnings. No one is taking that away from you, but it is also the perfect time to hone some great financial habits.
Naturally, you may scoff at such advice since lifestyle costs weigh heavily on the pocket even though family obligations are minimal. And, procrastination is not such a bad thing since time is on your side. Ironically, it is for this very reason that makes the twenties the best time to start saving.
Let’s say that you start saving at the age of 25 with the purpose of accumulating Rs 1 crore by 65. For ease of understanding, let’s assume the rate of return as 9%. To amass this corpus, one would need to invest Rs 2,140 on a monthly basis for the next 40 years.
Delay this exercise by just 5 years. If you start investing at the age of 30, acquiring the same corpus would require an investment of Rs 5,460 every month. Alright, that too sounds doable. Now let’s push it back further.
If you start investing by 50, you would have to shell out Rs 51,700 every month for the next 10 years to reach the target of Rs 1 crore.
When you start investing early, time is your best asset because it utilizes the power of compounding to the hilt. Harnessing the power of compounding will greatly impact your savings over the long term. And the sooner you start, the better.
How should you start?
Do a systematic investment plan in a diversified equity fund. This will serve many purposes. You will be investing in equity which is a powerful asset in wealth creation. By investing a small amount periodically, it will pose no strain on your pocket. Moreover, it will be automatically deducted from your bank account so no inconvenience either. And, you get to invest in a portfolio of stocks across sectors.
Read: 3 reasons an equity mutual fund trumps over buying stocks
Also, it would be wise to invest in the Public Provident Fund. The reason being, you get a tax break under Section 80C, the interest earned is tax-free, and the lump-sum on maturity is also tax free. The PPF is an excellent tool to save for the long term. With a 15-year lock-in period, it comes in very handy when saving for a goal. For instance, if you start your PPF account when you are 25, you will be able to access your money on crossing 40 when you probably need it for your child’s higher education. The PPF is also an excellent retirement savings tool.
Which brings us to the next subject – saving for retirement. Retirement is obviously a very distant dream from where you are right now. But it is inevitable. So don't ignore it as a goal. Both equity and the PPF are excellent tools to save for retirement.
The 3 best money moves to make before you turn 30:
- Harness the power of compounding since time is on your side. The sooner you start, the less you have to save because time is on your side. Money stashed away in your twenties will have decades of market gains and compounded returns.
- Utilize equity as an asset class to build wealth. This will give you an indication: On January 1, 1990, the Sensex closed at 783.35. On New Year’s Day in 2016, it closed at 26,160.90. Over these decades, the volatility would have been tremendous. But over these 26 years, investors who held on for the ride would be sitting on a nice pile of wealth. An investor who invested in the Sensex on January 1, 1990 would have made an absolute return of over 3,000%.
Read: The 3 essentials of equity investing
- Start saving for retirement. Doing so when you are young gives you a huge edge if you want to be comfortable financially during retirement. If you manage to allocate just Rs 5,000 a month towards investing, then ensure that the money goes into two different equity funds (Rs 2,500 each), and that one of them is solely for retirement. The other can be for any other goal like buying a home, saving up for your own business to be set up later, or saving for your child’s education. Retirement as a goal should not be given the backseat.
