8 things about personal finance you’d tell your younger self

I thought I had my personal finances figured out, but then I got a letter from my future self. 

Hey,

It’s great that you’re now making a living and ticking things off your bucket list. I hope headaches and back pains haven’t entered your life yet, because they are the real party pooper. How are the finances looking?

“Paise jhaad pe ugate hain kya!” we have heard it enough growing up, still do. You see the generation earlier believed in hoarding money as security, but our generation is preparing for a bigger picture – wealth creation.

We actually have the means to make our money grow, the only rule is to start early. Here’s a great example of how compounding works and why you should start investing sooner.

8 things to keep in mind while making a portfolio as a young earner:

1. 50-30-20 rule for Budgeting

Budgeting allows you to stay aligned with your investment goals.

Divide your after-tax income into:

• Essentials (50%)
• Wants (30%)
• Savings (20%)

Track your expenses to evaluate your expenditure habits. You can revise the portions to suit your lifestyle. E.g.,if you are staying with parents, your essentials might not have to take up such a large portion of your budget.

2. Start with Goal-setting

Even the never-happening Goa trip needs some planning, so does your investments. Long-term goals, such as travel, early retirement, a dream home or car, and so on, must be defined so your portfolio aligns with your priorities and risk-appetite.

Check out Kuvera for AI powered goal-setting and take a systematic approach to investments. 

3. Automate your Finances

Once you have defined your income, expenditure, and investment portions, it’s time to automate the process. 

1. Have two separate accounts- Expense Account & Savings Account
2. Have a cash cushion for emergencies 
3. Set up payments for bills & expenses 
4. Redirect a portion of your salary to SIPs 

Remember, it is the discipline of investing itself, not the amount, which is the real wealth instrument. Do invest consistently, even if it’s just ₹500 each month.     

4. Watch out for commission fees

Avoid paying commission fees whenever possible. Commission is like a parasite, it compounds with your capital and eats up a significant portion at the time of withdrawal. 

You can save up to 1.5% commission on certain regular mutual funds by shifting to direct mutual funds, helping you gain over 30% over a 20-year investment horizon.

5. Make a diverse Portfolio

Diversifying your portfolio is basically investing your money into different asset classes and securities to reduce risk. Eg. when the market risk is specific to a company or market segment, it can bring down your entire portfolio. So essentially, diversification is about striking a perfect balance between high and low risk instruments. That’s where FDs, index funds, PPF, gold, government bonds, and tax saving options like ELSS come into play. Explore more such options on Kuvera.  

6. First Learn and then Earn

“I believe that through knowledge and discipline, financial peace is possible for all of us.”

– Dave Ramsey, personal finance guru, author & entrepreneur. 

If you want to be a successful investor, you should understand how investment instruments work. Learning key concepts such as risk management, budgeting, inflation and dealing with market volatility could be extremely beneficial.

They help you make informed decisions, such as selecting how and when to save and spend, evaluating costs before making a large purchase, and planning for retirement or other long-term goals.

7. Keep an Emergency Fund

Not all challenges knock on your door before entering your life, so have an emergency fund equivalent to at least 6 months of your expenses.You can keep them in FDs, RDs, which are some of the safest and easiest ways to liquidate investments.  

8. Never forget “Health is wealth” 

According to the report by National Health Accounts (NHA), Indians spend twice as much on healthcare out of their own pockets as the Central and State governments do.

In FY 2016, Indian households spent ₹3,20,211 crore on their own, out of a total healthcare spend of ₹5,28,484 crore in India. This amounts to approximately 60.6 percent of total health-care spending.

As our expenditure on health-care services rises, so does the need for a good health-insurance policy. Buying a health insurance policy from a young age not only gives you more coverage at a lower cost, but it also allows you to organize your finances better.

Ensure that you are not being sold a policy in the name of “great returns,” but purchasing one that promises great health coverage. Having comprehensive medical coverage for you and your family will give you the freedom to focus on long term investments.

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