Nita Shah has just landed her dream job at one of the largest search engine firms and she is thrilled with her fancy package and the much fancier designation. A chance meeting with her father’s financial advisor, Janakbhai actually puts her into a quandary. "Nita, now that you have started earning you should also start seriously planning your finances" declared Janakbhai peering through his steel rimmed glasses. Frankly, Nita was not convinced. She was just 24 and this was her first job. Was this not too early for her to worry about financial planning? Should she not spend some time enjoying spending on the luxuries of a consumer economy? Actually, Janakbhai is bang on target! For someone like Nita the time to start financial planning is the moment they start earning. Let us look at some key financial planning steps that Nita needs to take.
10 Financial Planning steps to take when you start earning..
Start writing down your 5-year, 10-year and 20-year goals. Does sound weird, right? Don’t worry if you cannot write them down today, you never will be able to do it. You may be vague, but as you write them down you will get more clarity. When do you plan to buy a car? When do you want to move into your own house? How often do you want to travel to an exotic location? How do you want to contribute for your children's education and giving them a secure future? When do you plan to retire? At the age of 24, these may appear to be remote but then time does move fast and the earlier you start the process of writing down the more prepared you are likely to be.
Learn how to create and leverage a monthly budget. This is the key to your sound financial future. It is easy to spend your income; it is a lot more difficult to target a level of savings and adjust your expenses accordingly. That is where budgeting comes in handy. When you budget and catalogue your expenses, you get a clear idea where are the leakages in your spending pattern. These are habits that are best acquired early in life. It is only when you budget and regulate your spending that you can actually create meaningful savings.
Buy insurance and buy it more than adequately. The earlier you buy insurance, the lower your premiums. Don't worry about over-insuring yourself. As your liabilities grow, your insurance will still appear to be inadequate. Don't fall for high cost endowments. Focus on pure risk covers and get the maximum cover possible. Don't forget to take health insurance also early on.
You are getting into debt, so plan how to get out of it. It is hard not to get into debt. We live in a leveraged world. Your car and home will be obviously funded by a loan. Then you are likely to occasionally use personal loans and credit card to bridge your gaps. These are high cost debt and you must have a time-bound plan and the liquidity provision to defray these loans. The time you start earning is the time to initiate such plans.
How about seriously considering an emergency fund. Build an emergency liquid fund to cover at least 5-6 months of expenses. You could lose your job, you could venture into a business, or you could fall ill; anything is possible. Use your early days to set aside the emergency fund and let it be invested in a liquid fund so that it is liquid and also at the same time, prolific.
Sit down with your advisor and chalk out your long term goals. This is a very important step. You have already written down your goals; now create a plan around them. Sit down with your advisor and work out your investment targets. Decide upon your asset mix and how to save and invest to achieve these targets. The earlier you start your financial planning, the more time you have and therefore the power of compounding works more emphatically in your favour.
Start creating a nest egg for yourself. If you think that at 24 it is too early to plan your retirement, then you are mistaken. For all you know, you may realize that you are good enough to retire at the age of 45 itself. Nothing wrong with that! With increasing life spans, you need to plan a long post-retirement life. Ensure that you are adequately provided for. The earlier you start; the better off you will be post-retirement.
Acquire and maintain a good and steady credit score. In India it is called the CIBIL score but it is the key to your loan-taking ability in the future. Don’t overstretch yourself on credit, avoid too many credit cards and personal loans and avoid applying aggressively for loans. All these are negatives. When you take a loan ensure that you are prompt in EMI repayments as that will enhance your credit score. Don't avoid credit altogether. Zero credit history is also a negative when you approach banks.
Become conscious of your digital image. When banks give you a loan or when recruiters take a view on you, the make it a point to scour your social media pages like your Facebook page, Twitter handle, Instagram page, LinkedIn page etc. Ensure that these pages reflect the image that you want to project. As a serious professional, you cannot afford to give out a frivolous impression via social media.
Document, document and document. This may sound hackneyed and boring but this perhaps the most important task. Ensuring that all your plans, your documents, your certificates, statements, tax returns and financial plan are elaborately documented and filed. Create an online/offline filing system that makes it easy to trace whatever you want within a few minutes.
So you are never too young to embark on your financial planning process. In fact, the earlier you start, the better off you will be.