Turning 30 is an alarm for most people. Typically at this time, we enter a new phase of life - either we get married or have kids (or plan to have them). This article will guide you to take nine important financial decisions that you need to make and implement before you turn 30.
Start Investing Early
Compounding has its own charm. In simple words, consider below an example for more clarity.
Salim and Ramiz starts investing. Salim starts investing Rs 10,000 every year at the age of 25 and stops at the age of 35, but does not withdraw. Ramiz starts investing Rs 10,000 every year at the age of 35 and continues till he’s 65 years old
Who do you think will have more money when they are both 65?
Surprisingly, Salim will have 2.5 times the amount Ramiz has (Rs. 1.28 Crores Vs Rs. 46.5 lakhs), even though Ramiz invested for 20 years more.
What happened in this case is that for Salim, money started compounding early, and earned interest, which in turn generated further interest, and this goes on. This is the true power of compounding. Even if it’s just Rs 10,000 a year, it will compound to many times that amount by the time you retire.
Buy a home or stay in rented place?
Most of us would like to have a place we call sweet home. The question you have to ask yourself is, do you need to buy one or would you want to stay in arented place?
Buying a home is more of an emotional purchase rather than a logical one for most people, especially if they are taking a home loan. Understand the pros and cons of owning a home/living in a rented accommodation and make a decision. Your home buying/renting decision will have a huge impact on your future financial planning since it’s probably the biggest single ever investment you’d make in your lifetime.
We have all, at some point of time, seen those LIC advertisements. It portrays the role LIC plays in helping with children’s marriage or education when the earning member of the family has passed away unexpectedly. While we all wish it does not happen to us, life is highly unpredictable.
Make sure that you get a life insurance – term insurance is most recommended. The earlier you get a life insurance, the lower the premiums and complications. And don’t stop with just life insurance. With rising medical costs, you also need to get a medical insurance to cover your medical costs. Even if your employer gives you a medical cover, take one additional to cover you and your entire family.
Taking medical and life insurance also helps you save tax under Section 80D and Section 80C respectively.
Insurance is an expense and not an investment. Don’t fall formoney back plans that typically give you much lower returns for your investments. When choosing life insurance, always opt for term insurance.
Set aside an emergency fund
You should set aside at least 2 years of your annual expenses (including any
EMIs you might have) in a separate emergency fund. Make sure you do not withdraw from this fund unless there is any emergency. And note, upgrading your hatchback to a sedan does not count as an emergency!!!
Make the right career choice
Chances are, by the time you are 30, you would have switched a couple of jobs. If you are not yet settled in a job (not a company, but a line of work), you have to do some soul searching. Find out what ticks with you and stick to it. Just because you might have read about someone starting up and claiming that you should be your own boss, doesn’t mean you can succeed at your own business.
Take calculated risks. Following your passion does not guarantee that it can help you pay the bills. In all likelihood, the moment you try to earn a living by following your passion, you’d probably start liking it less.
Figure out what makes you happy and helps you pay the bills. Then stick to it and follow a routine investment plan to ensure you have enough savings to help you retire and do whatyou are most passionate about (even if it means you have to keep spendingmoney on it).
Invest in yourself
There are two ways to get more money. One, be thrifty and save as much as possible. Two, increase your income. The latter is better because there is only so much you can control when it comes to saving. There are too many external factors (rent increase, petrol prices shoot up and so on) due to which making money by controllingexpenses become difficult.
As per experts, it is better to increase your income by investing in yourself. Learn a new skill so that you get a promotion in your current job. Or may be just spend money for a relaxing vacation to make you more efficient when you comeback fresh.
Plan for retirement
Unfortunately, most people are not prepared enough for retirement. Either they miscalculate the amount of money they require at the time of retirement, or start saving when it’s too late. Don’t make the mistake of not having enough money and having to rely on your kids for your expenses.
Start planning for your retirement before you hit 30 (the earlier thebetter).
Become debt free
If you are not debt free yet, you are not alone. With easy access to loans and EMI schemes, more Indians than ever are under debt. Debt is something that you need to get rid of before you turn 30 – or at least take steps to minimize it. The next time you get your bonus or hike in salary, instead of the latest feature packed mobile on EMI, decide to prepay your loans and become debt free as soon as possible.
Experts say while becoming debt free is good, not all debt is bad debt. Debt taken for purposes of creating a long term high value asset (like starting a businesse or buying a reasonably priced home within your budget) is fine.
Plan for your children’s education and marriage
Even if you don’t have children, it pays to make a financial plan. With the spiraling cost of education, it’s important that you start planning as early as possible. Some kinder gartens charge you more than a lakh for admission. A medical seat in a reputed private college can be more than 60 lakhs. An MBA froma good business school can easily cost you 13-15lakhs (50 lakhs + ifyou want to do it from a reputedschool outside of India). That’s how expensive good education has become.
Make sure you start a SIP for your child as early as possible so that by the time they want to get into a good college, lack of funding won’t hold them back. You have heard of the big fat Indian weddings. When it comes to your children’s marriage, you want to celebrate it and that’s fine. These are small things in life that are ones in a life time moments. Make sure you set a separate target for your children’s marriage spending and work towards that goal. Since the cost of conducting a marriage is increasing at a very rapid rate, traditional saving accounts like bank FDs and RDs won’t work.
Experts recommend to start a SIP in equity mutual funds. One year before the event, move the total corpus to a debt fund for protection from volatility of equity market.
[The author, Manzoorhasan Shaikh, is a Mumbai based Chartered Accountant.]