You are in your early twenties, you have just completed your graduation / post-graduation and you have been placed in a corporate through campus interview. You join your first job and have already made plans on how to spend your first salary; in fact your first couple of salaries. This tendency to spend continues, sans any focus on investment.
It is not before long that you realise that you are 25 and you have not saved / invested any money (excluding tax-saving investments done during December to March) in the past few years of your professional life. There are exceptions to the rule everywhere we cannot deny any of a few being present in this category too. However, 25 may not be too late to start your investment journey, it might in fact be the perfect time to start.
As investors pass through the various phases of their professional life, they usually spend and invest according to the following pattern:
Here are the major reasons why turning 25 should be a wake-up call to start investing.
Working under pressure: By this age, a common Indian investor is married and might be planning a child too. It is by this time that you realise that there are mouths to feed and take care of. You would have already felt the pressure of these responsibilities when you go through the following stages of life
* Marriage – Marriage and honeymoon expenses, purchase of consumer durables and furniture to transform bachelorette apartment into a home
* Pregnancy and childbirth – Doctors’ fees, hospitalisation expenses, expenses on various religious rituals associated with pregnancy and childbirth, etc.
* Parenthood – Expenses of a nanny, baby food and care products, celebrating your child’s 1st birthday, child’s admission to a play school.
When you celebrate your 25th birthday, you realise that you have not saved anything to meet your further responsibilities – children’s education, homebuying, etc. At this juncture of your life, making that first investment stroke is very important.
Short-term versus long-term goals
Remember those times in school when you had this habit to study for your examinations and work for your projects at the last moment. In your professional career too, you would have the tendency to leave all your work pending until the day before submission. During your 20s, your financial responsibilities /goals are small and short-term in nature, such as planning for that vacation, downpayment for a vehicle, purchase of furniture, etc in contrast to goals later in life such as downpayment for house property, children’s education, their marriage, etc. Short-term goals can be met easily by saving diligently for a couple of months and then spending again. However, when you reach the age of 25, you realize that slipshod work shall not continue for long.
A real-life financial crisis acts as an eye-opener
As they say, one has to lose money in the equity market to understand the way it operates; in the same way a real life experience teaches you what no financial planner would have been successful at making you understand.
By the age of 25, either you or anybody in your acquaintances would have been going through or would have gone through a financial predicament. This crisis would have been on account of job loss, unfortunate death, accident, disability, critical illness, hospitalisation expenses leading to a financial gloom. Imagine a time when a friend comes and asks for your financial help for overcoming such crisis or vice versa.
When you hear about or go through such experiences, you are forced to overhaul your money management techniques. You decide to keep aside money for emergencies and you start saving and investing systematically in recurring deposits (RD) or in Mutual Funds systematic investment plans or in the equity market.
A reality check of your networth
At 25, you would have been working for at least over a three to four years, in which time, you would calculate how much have you saved and invested after putting 10-12 hours at work each day; you realise that it is near to NIL. You do a quick back of the envelope calculation of how have you spent your hard earned salary, but in vain.
You understand that the best utilisation of your salary was to pay back your education loan (if you had one) and the rest of the money has been spent on gadgets, travelling, partying, buying consumer durables and furniture, etc. The only question that is ringing in your mind is “Where has all my money gone?”, the answer to which you will never be able to get.
Quality does matter
Once you turn 25, you realise that it’s not only the quantity that you have saved but also the quality of investments that make a major difference. You might have saved for yourself to peddle through a crisis; however your investments do not generate enough liquidity for emergencies. You understand that the money that you had saved for hay days such as in an ULIP plan does not even return the capital employed, from a 3-5 years prospective. You acknowledge the fact that “0% interest on EMI through credit card” is a misnomer.
After reading so far, here are five basic financial objectives, which you should achieve by the age of 25:
- Understand the “power of compounding” and “rupee cost averaging”
There are two basic types of interest calculations – simple and compound interest. Simple interest, as the name suggests, calculates interest on the basic amount invested; however, compound interest calculates interest on the interest already earned. Let us understand this with a basic example as follows and also read how compounding interest works?
Rupee cost averaging is the technique of making a particular investment through a fixed amount on a regular schedule, regardless of the price. A higher quantity is purchased when prices are low, and fewer quantities are bought when prices are high. Eventually the average cost of purchasing a unit steadily reduces. You should note that if you start early power of compounding can be magical!
Systematic investment becomes important when an investor earns a regular income such as salary for meeting his day-to-day needs. Starting a mutual fund SIP early in your working career and staying invested with it is the best idea.
1. Prepare an emergency corpus
Having an emergency corpus helps you to financially manage a job loss, illness and accidents, etc. The corpus should help you survive through a storm of insurgencies. It is said that three to six months’ salary should be kept aside for emergency.
2. Be debt-free
It is advisable that you free yourself from all debt especially credit cards. Credit card bills accumulation is just like a parasite eating into your earnings. If you have any education loan please note that it should be settled by the time you become 25. The basic technique of building a debt-free portfolio is to spend less than you earn. Make sure that you pay off your EMI at the beginning of each month and manage the rest of the month’s expenditure with the remaining. While remaining debt-free is a great idea, you should also know how to make your money work harder.
3. Save for unbudgeted expenditure
At least once in a couple of months, you will have to spend on unbudgeted items such as a vehicle, consumer durables, repairs, etc. This expenditure brings throws your monthly budget into total chaos. If you save at least 10% of your take home salary, then you’ll have enough money saved to meet these sudden spends without damaging your monthly bills. If you feel that you cannot save 10% of your earnings, then you should cut down your expenditure accordingly to fit it in.
4. Start building a retirement corpus
You might think that 25 is too early to start preparing for your retirement; however you should start taking baby steps to achieve the goal. For this, you could start investing in a Mutual Fund SIP with an amount as low as Rs. 500-1000 per month. This will help you in planning your life goals with mutual funds and help you retire rich (see image below)!
If you make sure that you take the abovementioned basic steps at age 25, you would be better prepared for an enriched financial life tomorrow. With growing work pressure and stress level we are retirement from our working life a lot earlier than what it used to be in our parents case. But surprisingly the average life expectancy in India has increased considerably. This effectively means that you might have to retire early form your working career but you will have to live long post your retirement. Therefore, retirement planning should be the first priority when you start your career.
The author is head of Money Mantra, a Mumbai-based financial advisory firm. Views are personal