The earlier, the better – this is one of the most heard financial planning statement you might be aware of. And it is true. The early stages of life, like the 20s, are the best years to lay the foundation for your finances. If you are just starting out, it’s the perfect time to make some pivotal financial decisions. From building emergency funds to making investments, you should start taking actions today. In this post, we will be talking about the five essential money moves you can consider in your 20s to get on the right financial track.

Track your spends

Follow the 50-30-20 budgeting guidelines. As per this goal, you should spend 50% of your living expenses, such as groceries, rent, bill payments and more. Then, put aside 30% of your income for discretionary spending like food, entertainment, travel and hobbies. Lastly, the 20% of your income should go towards savings. These can be short-, medium- or long-term goals, including emergencies and retirement planning.  

This is a great way to develop discipline and ensure a better quality of life. However, you are free to adjust the ratios based on your age and personal circumstances. For instance, if you don’t have rent to pay, you can classify and use the allocated fund under another category, let’s say, savings.  

Make saving a habit

When you start financial planning, you must balance your expenses and savings. The best thing to do here is to have a separate salary account. You can schedule transfers from this account to your main account, be it a high-yielding or zero balance savings account. This automated transfer acts like a financial discipline tool, ensuring a portion of your income is saved before you have a chance to spend it.

You should first prioritise establishing an emergency fund to cover the cost of about three to six months of living expenses. Start by saving small. You can set more attainable savings goals, like setting aside a fixed monthly amount, let’s say, ₹5,000. This sum depends on your capacity. You can increase it gradually to provide a sound financial cushion during emergencies.

Build a good credit profile

A solid credit profile is equally important to qualify for the best financial products, be it credit cards or loans. The higher your credit score, the better terms you will receive. Apply for a credit card if you have never taken on any debt before. Some banks, like Kotak811, also offer credit cards against your fixed deposit. So, get yours to begin this journey. Then, use it wisely and make sure you pay all your dues on time. At least pay the minimum bill amount on time every month so as not to let it affect your credit score.

Don’t drop your score by over-applying for credit. A portion of your credit score depends on the average age of your accounts, and new credit applications might lower your score temporarily. Multiple applications in a short period could suggest financial instability to lenders.

Start investing

You can begin your investment journey in your 20s for long-term financial success. There are various investment instruments to choose from. For instance, starting with SIP (Systematic Investment Plans) in mutual funds could be a flexible way to accumulate wealth by regularly investing in small amounts.

In addition to this option, you can invest in Equity-Linked Savings Schemes (ELSS) and the National Pension System (NPS) to build growth while saving tax. Diversifying your portfolio is essential to minimising risk without sacrificing returns.  

Monitor Taxes

Understanding and managing your taxes is a crucial factor in financial planning. First, determine your after-tax salary and how it aligns with your financial goals. Also, being aware of the different tax slabs and how salary increments can affect your tax payments is crucial. For instance, if your salary increases, so does your tax rate, which means a raise might not increase your take-home pay as much as expected.

For investments, considering the tax implications is also vital. For example, investments in NPS can offer tax benefits under Section 80CCD, including deductions up to ₹1.5 lakh, which can reduce your taxable income. Similarly, investments in ELSS qualify for tax deductions under Section 80C, providing both growth potential and tax efficiency.

Endnote

Just like you invest in your future with savings, consider investing in health insurance. It’s a smart way to make sure you’re covered for those unexpected medical needs. Good health insurance means you won’t have to dip into your savings for medical emergencies, which helps you keep your financial plans on track. Plus, it gives you peace of mind knowing you’re protected.