Twenties are all about experiencing carefree freedom and exploring life. You have probably just graduated from college, settled into a job, and paying off student loans. Financial planning is probably the last thing that’s on your mind now. But here is the thing – if you use your 20s to start investing, you are already laying down the foundation of the lifestyle that you are hoping to live in your older adult life.
Following are the six investment rules that you should start following in your 20s.
Start Saving Early
Your worth is not calculated by how much you earn, rather by how much you have saved.
Starting early will help you reap the benefits of compounding, which is the real secret of wealth creation. Saving Rs 10,000 at age 25 versus age 40, with an interest rate of 7% and holding it till age 60, will fetch you around 200% more return.
Like Warren Buffet says, "My wealth has come from a combination of living in America, some lucky genes, and compound interest." There is definitely a learning there.
Follow the 70-30 rule
Adopting the 70/30 rule in personal finance is the fastest way to build wealth. The rule defines 70% of your income should be used for meeting daily expenses, and rest 30% should go towards saving.
The 30% is again divided by 10/10/10 rule, where 10% of your income should go towards long term investments like PPF, mutual fund SIP etc. The other 10% should go towards savings and the remaining 10% should be utilized for fulfilling your passion.
Make Long-term Investments
Starting a long-term investment helps you create financial security and effectively realize your long-term goals. Starting early is one of the basic rules of investing, as compound interest works like magic.
Linking your investments with a financial goal helps you to understand your risk tolerance and serves a purpose for your investments. And, adhering to the golden rules of investing will help you protect and reach your financial goals efficiently.
Take calculated risks
Mostly in our 20s, the majority of our decisions are impacted by emotions and what others are doing, for example, whether to continue with the present job or starting a new investment etc. This greatly impacts our decision-making process and the ability to move forward in life.
Learning to take calculated risks will help you take control of emotions, energy, time and money. This will result in improving the overall decision-making process. There are pitfalls attached in taking risks but for starters, it helps in gaining new life experiences, learn new skills and ideas.
All of these adds value in life and helps overcome several fears and unnecessary habits.
Create a Broad Financial Plan
Just starting to invest randomly in order to become financially stable and secure is not the only answer. It requires a good understanding of how you are going to spend the money and invest it to make it grow faster. Creating a financial plan helps in achieving that goal.
Financial planning helps in determining our long-term as well as short-term goals, and the ways in which we will meet those goals. The major components of a financial plan include budgeting, investment strategy, tax planning and risk management.
Gaining financial knowledge in your 20s is the most important step towards attaining financial stability and get you closer to your dream.
Adjust your Savings According to Inflation
One of the unique features of money is that its value is always depreciating. The number of goods a Rs-100 note can buy you today will not be the same in the next 10 years.
Therefore, it is extremely important to keep adjusting your savings according to the rate of inflation. Otherwise, you run the risk of falling short of your financial goals.
Understanding the concept of inflation-adjusted returns, also known as the real rate of returns helps to provide a realistic comparison of all investment performance.
Personal finance knowledge is critical for financial success in life, and the earlier you start, the more you are benefitted. Inculcating the habits of savings, investing and practising financial discipline in your 20s will go a long way in securing your future. It goes without saying that a financially stable and secure person is happier and satisfied with his/her life than others.