Are you Ready to walk on path of Financial Independence?

The other day I got a call from one of my old friends and he was discussing the financial planning for his 20-year-old son who is studying in a premier engineering University of India and have BIG dreams. While father was sounding little pragmatic in approach and the teen was full of excitement and had BIG plans. He wanted to study further in a leading University on this planet and was more interested in adopting new challenging lifestyle. The father was more interested in planning his financial journey of next 10 years and he had another son who is 15 as of now to plan for his next education milestones. I tried to make a balance of both exuberance of son and pragmatism of the father and convinced both to follow simple financial planning rules of budgeting, allocation and remain debt free. During the discussions with them I thought to share my own formula to financial independence and achieve it as early as possible in your lifetime.

The major issue is finding a balance in fast running adrenaline in young bubbly and cautious defensive experienced individual. The family which gets this balance right they get on to the path of financial independence early. That is the secret sauce for the recipe balanced portfolio.

The one who is entering adulthood thinks he / she will get to move on his /her own as soon as going out of graduation, will move into his / her first apartment within 2 years and launching a new career or start-up. This vision does not include paying off student loan or any other debt, joining on a low paying entry-level job, or building on the contingency fund. The individual is not aware of financial planning and making right moves while on this new journey of adulthood which needs far more responsible and meticulous approach.

More than 50% of general masses in India are not aware of financial planning & resulting into financial independence and 60% of remaining are struggling to catch up the lost time due to early delays in their life cycle towards the pinnacle of financial independence. Rest 40% of this lot (20% of total population whose wards are in early 20s) finds themselves on right path to financial independence and encourage their wards also to move in the same direction at an early stage of 20s.

Reality check is that each decade plays an important role in our future financial health and It is important to plan at every stage of your life cycle to analyze your financial health and plan to catch up on areas which are left ignored. The more you follow to check & balance yourself every year, the better financially organized you will be. So as annual health check-up is important for you same way annual financial health check-up is also required.

Now it’s time to share my perspective of financial planning at every decade of an adult and where should one focus to gain financial independence as early as possible. I will also share few critical money allocations in this journey and would urge everyone to follow them to put yourself on a path of lifelong financial success and independence.

Money Management in 20s :

Start learning to sit on CASH, Create your PAN & Start filing the Tax Returns.

First & foremost apply for Permanent account number for your ward, get one independent savings account for him/her. Now a days the young generation gets involved in lot of freelance work, vocational hobbies which generate money also, coding, graphic design, fashion design, gaming or professional players or musicians or even scholarships and they all generate money in bits and pieces. Right from toddler to teenager every time they get lot of birthday gifts, festival or family gifts, gifts on BIG celebrations / occasions, handsome pocket money etc. All this should be saved in personal savings account of the toddler, and it should be saved over the years so that it becomes a handsome amount when the teenager completes 18 years.

All these savings result in big chunk of money which is enough for a student to become a taxpayer as well at the age of 19 only. The earlier it is better so that the individual is ready to become financial literate at this age of fast learning & adaptation only. It also helps the parents to save some tax as once the teenager gets separate independent savings account along with PAN, teenager can file tax return on their own and reduce the tax liability on amount which has been accumulated in the toddler account over last 18 years. The teenager who has started earning from his vocational or freelance work will start paying tax on his / her earnings.

It helps in building a concept of law-abiding responsible citizen of India in the young mind at an early age and creates a wonderful profile with high rating score which is ready to expand its wings towards bigger professional goals of setting up a start-up or taking credit / debt for achieving any key milestone in his personal or professional life.

Such savings will come handy while buying the first home or car or marriage or foreign holiday travel plans in future. How to manage these savings and where to invest them for better returns depend on scenarios of market and will keep on changing. I will talk about these options separately.

Learning Budgeting skills

Budgeting is a normal exercise which happens in every household, and it should be passed on the teenager at an early stage of 20 only so that the teenager learns to build dreams accordingly. I am not advocating to avoid cream BIG but dream realistically. At the same time, I do not wish to encourage teenagers to dream with constraints, but they should dream rationally and work towards realizing their BIG dreams at early stage so that they do not feel left out after 10 years and do not have to repent on their financial decisions.

Budget will help teenagers in putting themselves in control of their finances as they will realize where their money goes every month. There are lots of apps and online tools available which help in making this simple exercise much easier. Now a days few banks are also providing such tool to savings or credit card account holders to know the spending pattern of an individual throughout the month. Learn your spend behavior and avoid the impulsive buying decisions on online or offline stores. The rational spending habit will take the teenager to a controlled & judicious spending behavior and will benefit in long term. Caution: I am not asking teenager to become miser here but spend money on value additions more freely through budgeting exercise. People learn it at a very late stage of life cycle when either their spouse make them realize these leakages after marriage and they feel really depressed that “my better half is controlling me too much”.

Pay Off Debt

“Debt is NEVER bad” as we have been told by our previous generations. Learn this fact at an early stage. Only thing is that your earning should be more than your loan interest outgo. It is an art to manage the loans and navigate through your life stages which people in India learnt very late in last 3 decades with banking liberalization & tax sops announced on home loans in 1992 in Indian context.

Teenager should be made fully aware of all tax benefits available to an individual on loans and should also be told which loan is good for you and which is BAD. As long as one earns more than the interest paid to bank on the loan amount it is a good loan; like Home Loan is the best loan available in market. You save more than your interest paid to Bank along with some earning or saving in terms of saving rentals in a new city or earning some rental on bought house in same city where you were living with your parents. But buy ready to move in house property only.

Avoid taking personal loans and Loan / cash on credit cards is a BIG “NO” for anyone. Personal loans should be the last option to take as it takes away all your savings while paying it off. Also, you can never earn more than interest outgo on a personal loan unless you start speculating which one should always avoid to become financial independent. Speculation at any life stage is disastrous for the financial freedom.

In my view one should avoid taking even car loans or educational loans also. But if you are forced to take such loans to be able to earn a degree or a vehicle for yourself, one should always look to pre-pay it at the earliest.

At times, such loans can also quickly overrun your life if you aren’t careful. The early 20s are ideal to pay off any educational loan or car loan before you encounter further family responsibilities / commitments, and you walk debt-free into your 30’s.

Build a Contingency Fund

It is good to have some contingency fund. The long term accumulated savings in your bank account act as a emergency fund to fight with any BAD news like sudden lockdown due to any pandemic, any financial turmoil, any sudden exigency where secret stash of cash to deal with any bad news of life like layoff, medical bills, car repair), it can also be about having the cash to seize an exciting opportunity. Having savings gives you the freedom and security to deal with whatever life brings your way — good or bad.

Understand Credit

Teenager gets to exposed with credit score which will influence one’s life in coming future. This number can play a big role in getting you a JOB (specially in finance field), buying a home or car or electronics or interiors of your home or your foreign travel etc wherever you seek an assistance from Banks. It is important that you check your credit report and learn how it can be improved further.

Get Adequately covered with Insurance.

One would argue that why is insurance needed by a 20-year-old and couple of years back financial planners used to advise taking insurance after you get married only but now with changing times of pandemic the health & Life insurance both should be promptly at the age of 20 only so that Health & Disability gets addressed on priority. A simple Health plan & simple term plan is enough up to age 80 years should be taken so that you enjoy maximum benefit of starting early and getting adequately covered also.

All above mentioned steps act as a building blocks in journey of financial independence of an individual. Please make the teenagers aware of all these important points at this stage only so that they take prudent & independent financial decisions and do not have to catch up if they start following these little later. If they are aware of all the above points, they will lead a peaceful life and will not fall in trap of loans or credit cards or impulsive buying habits etc. The literacy enables an individual to take right decisions every time.

Financial Planning in Your 30’s:

After defining the foundation of your financial planning in early or mid-20s, a good financial plan defined in late 20s or early 30s is crucial to achieve financial freedom at mid-50s, in some cases it can be achieved in late 40s also provided you plan & achieve your personal life milestones by late 20s. So, if you get married early (by today’s standards in your mid 20s) and plan your first baby by late 20s you can achieve become financial independence by early 50s also. But these are simply personal decisions and I do not wish to influence them at all. All I wish my readers to achieve financial independence in their lifetime and a fantastic financial plan made in 30s influences most of your life in your 50s, therefore it is crucial.

Increase your allocation to Insurance.

Enhance your Life Insurance Term Insurance and Health insurance coverage as you would have expanded your family size and responsibilities by now. Take term life insurance for your spouse also if he/she is not yet covered but assuming they are also following my financial plan so they would also be adequately covered by now. Increase the disability rider allocation as you are more responsible now.

Buying Your First Home

By now you would have either bought a home for yourself as explained the utility of taking a home loan earlier. If no, then now you should definitely buy a home for yourself. Creating a budget for home is most important and while it depends on your family size and city in which you are taking the home, financially the budget should be as per your earnings. So, if you & your spouse both are paying Income tax in 30% slab as per old tax regime) one should buy a home of 65 lacs to 70 Lacs. with a loan amount of about Rs. 60 lacs. As per current rate of interest on home loans the EMI for loan of Rs. 60 lacs would be about 50K for a loan tenure of about 20 years. Both taxpayers will be able to take full advantage of Zero tax on income of Rs. 2 Lacs each and will also get a decent 2 BHK in any BIG city of India as per current standards. This is just for illustration purpose, and it will be a winning formula provided the regulations remain as it is. Please review this plan as per the changes in regulations which is highly sensitive for financial regulator in India. Please do not over think here or do not go by the advice of any real estate dealer while determining the size of the property or budget of the property. You need to take care of registration charges, spend on interiors as per your taste while creating a budget for buying a Home. Do not get tempted to over stretch yourself in these pandemic times by looking at next year increment in salary or expected bonus pay-out etc while creating a budget for buying a home. However, you may consider the sudden flow of excess funds like from value arising out of sale of ESOPs or maturity of any life insurance taken by your parents, or any Mutual fund or fixed term deposit made by your parents or any expected but sure flow of funds from your previous investments in stocks or MF, if any for cash down payment and accordingly you can plan your budget for home buying.

Invest for days when you hang up your Boots.

Now since one has spent 20s in building the foundation for financial planning, it’s right time to create plan to address the big goals like investing for retirement. While if one is in job a fixed portion of salary goes into EPF and gets accumulated over the time which is called your lifetime savings, one should plan & save about 15 to 20% additionally from the monthly income every month for retirement only (this is my recommendation, rest it can change from person to person depending on spending behaviors). This is apart from saving for kid’s education or kid’s marriage. Create a handsome corpus by investing in safest options available and at a rate of return which continuously beats inflation else it is a wastage of money. I will talk about these options in detail separately.

Invest for Kid’s higher Education or Kid’s Marriage

This is most important aspect and would help your kids to avoid any debt when they start their financial journey in their early 20s. Invest about 10 to 15% of your salary for kid’s education or marriage. Monthly savings and monthly investments are key to success here. Please do not touch this amount through out the investment period and utilize it for the defined purpose only. Again, the investment mantra is same Highest safety and beating the inflation by BIG margin.

Savings for Self

Though it is mentioned in last, but it is most important for achieving the financial freedom early. Keep on rejuvenating yourself regularly by going out for a family vacations and saving for such excursions. One should always save for these extravaganzas on monthly basis and about 5 to 10% of the monthly salary should be saved for this crucial purpose. If you take care of your body and mind it will run fast on financial independence path. Do take care of your regular body wear out and plan relaxing travel twice a year along with personal care by hitting the gym regularly or following your passion regularly but within limits of 10% of your salary.

Review your financial performance every six months.

Please keep a track of your investments and maintain the diary which should be entered every six months with all your liabilities and assets. Review the performance of your investments. Are they on track and beating inflation with a GOOD margin? Mention short term goals in that diary and review your performance / achievements every six months against those targets. It will help.

To Be Continued………