How to start financial planning at age 20

They say there's no time like youth. If you are 20 something, give or take a year or two, and have just started working, you have an immense opportunity to become super-rich. You no longer have to be dependent on your parents for pocket money, when you have your own money. M Barve, a Mumbai-based independent financial advisor says, "The sooner you begin, the better it is. Good financial habits are best inculcated in the initial years itself. A few years of delay in financial planning can cost you big money." For instance, assuming you are 25 and start saving Rs 3,000 a month today until the age of 50, at a 10% rate of interest, your money will grow to Rs 38.9 lakh. But if you start at the age of 35, the money will grow to around just Rs 12.5 lakh, a good Rs 26 lakh less that you would have earned if started earlier. So, it's smarter to begin early.

Start with dreams and goals: At this point in life, you will have goals and dreams. It's good to start here. If you know where you want to go, figuring out the path to reaching there is easy. So naturally, the first step is to sit and write your goals. For instance, you want to go on a Europe trip after three years, this is a short-term goal; you want to get married after 10 years, it's a medium-term. You want to retire thinking rich at the age of 55 and travel around the world, this could be your long-term goal. Barve says, "These goals you plan will be dynamic and they could change with time. But it's still better to start with short, medium and long-term goals." Don't get overwhelmed by these goals. No one is asking you to figure out your entire life today, but dream a little to know what you want from life and when to turn them into financial goals.

Budget and start saving: Once you've made the goals, the next step is to budget your monthly salary. Usually, those who are new in a job tend to have lower incomes. Instead of following the equation "Income minus expenses = savings" follow the equation "Income minus savings = expenses" This means save first spend later.

Medical insurance: As far as medical insurance goes, ensure that you have insured yourself, over and above the insurance which your employer provides. Anuj Shah, chief financial planner, Wealth 360, a Mumbai-based financial planning firm, says, "Their earnings are less and one major hospitalisation, could even go to 40-50% of their annual salary. So, it can create a liquidity problem if they don't have assets. They should buy medical insurance, as even if they are young and healthy, there could be a medical emergency. Plus, the cost of the premium is very less." What if the employer is covering your medical expenses? Shah says, "In that case, you can buy a top-up cover or high deductible insurance. It kicks in after your employer's cover has exhausted. Hence, the premiums are also cheaper and affordable." Say employer's insurance cover is of Rs 3 lakh but if your hospitalisation amount comes to Rs 5 lakh. For that extra cover of Rs 2-3 lakh take the extra cover or high deductible insurance. You can buy this from any insurance company that offers such a product, and need not be the same insurance firm that is tied up with your employer.

Loans: There is a good possibility that in the twenties you may have an education loan running. But buying a fancy laptop or the latest iPhone is equally tempting. Try and pay as much as possible towards the education loan first and pay it off. This will set you free to plan your other life goals. Barve says, "Do not take any parallel loans when you already have one loan. Once you've settled the earlier one and know the direction your career is taking, then you may probably go for larger debt."

Life insurance: Shah says, "For life insurance, you have level premium, which means the premium remains the same. So, for a 24-25-year-old the premium amount will be less and for a term life insurance policy for 30-40 years, the same amount will insure you even as you grow older. "In short, the advantage of taking insurance early is that premium will be less and it may not change much. Shah says, "Later on in life when their human life value increases or they have dependents, one can take another term insurance plan."

Retirement planning: It is also not something you should ignore either at 25 - even though retirement is still may years ahead. Barve says, "You should start planning for retirement as soon as you begin working." Apart from an Employees' Provident Fund account, open a Public Provident Fund account which is a zero-cost, risk-free and tax-free debt instrument.

Wealth creation: Invest a higher amount of your savings in equity and a lower portion in debt instruments when you are young. So, if you are 25 years old with savings of Rs 5,000 a month, you can look at investing Rs 3,500 in equity mutual funds through a systematic investment plan.

In short take baby steps towards your finances, figure out life and lifestyle as you grow in your career.