If you ever had a question ‘How to manage personal finance at the ’20s?’ this is where you get all your answers in the simplest way possible, without boring you with strong financial terms. Actually, we all have been managing our finances more or less without even knowing that we are.
Remember the time when you used to get certain pocket money & how you used to chalk out everything in your mind about how to spend that money? That is the simplest form of Personal finance at the primordial stage of our lives.
As we grow older and reach in our twenties, life starts to change a lot. Sooner or later college gets over, then you start earning, in fact, many of us start to earn even before. But how to manage our earnings well to have a relaxed future? Let’s find out.
What Is Personal Finance?
In a simple layman’s term, when a person plans & chalks out what to do with his earnings is called personal finance. It includes savings, investing, generating other income sources, budgeting, retirement planning and much more. Personal finance is more of life skill and less of a procedure. And we all are somewhere already into it, but as we don’t know the hacks properly, we are unable to execute it properly.
It’s a skill set which is not taught in school or colleges often, but probably it is one of the most important life skill one should learn in order to grow his money. When you reach the age bracket of ’20s, you start to experience loads of things, positive & negative, in your life. But one thing which you learn the most is how money is so important in our day to day lives, and also how hard it is to earn a good sum of money.
You just can not put your money in your bank accounts and chill at peace, as you are ‘saving’!. Excuse me, you are not. Let me tell you how. Your savings account provides a 4% interest every year on your accumulated savings in the account. In case you have ₹100,000 in your savings account, it will become ₹104,000 after a year and you may think you are an ultimate gainer. But you are not.
In India, the inflation rate is somewhere around 5% every year. Now, what is that? Inflation means a continuation rise in the price level of the goods and commodity in a country, years after years. For example if you could buy 1Kg of wheat for ₹50, the next year it will become ₹52.50. So there’s a 5% hike in the price. As the money you save in your bank account gives you an interest of 4% & the country’s inflation rate is 5%, there’s a 1% gap where you are losing, big time losing.
Then you might ask how to manage personal finance at ’20s? Here you go. Here are a few tips and tricks, also you can say personal finance hacks for you to manage your money in the best possible way.
7 Best Ways To Manage Your Personal Finance At ’20s :
1. Don’t Opt For Saving Accounts :
Now we are not saying don’t even save. Of course, do, but also understand that there are other financial tools where you can invest your money and get greater benefits. As was said in the above paragraph about how negligible profit you get in your savings accounts, so why going for it? There should be a perfect ration in which you should divide your income. We will discuss them in the next point, but let us understand how savings accounts work?
A bank is a financial institution that receives and deposits money from the people and lends money to the people who need it. Now understand something, we all keep our money in commercial banks. And all the commercial banks are regulated and supervised by a central bank, in India, Reserve Bank Of India (RBI).
Now every bank has some obligations to maintain. Whatever money gets deposited into a bank, the bank has to keep a certain percentage with the RBI & a certain percentage with themselves. Both the percentages combined together are around 25%. There is some additional obligation for another few percentages. And the rest of the money bank uses in the market. How?
- Bank gives out loans to people and people repay them back with interests. Suppose the bank is taking your 1L from your savings account and lending out to someone, the bank will receive around 8% interest. Bank makes an 8K and gives you 4K for you 4% interest p.a.
- Whatever FD and deposits with time lock-in periods, the bank invests them into financial tools like bonds & shares. The same case happens here as well. Bank earns more, and you get some.
- Bank directly buys shares and debentures and earn a huge profit, you still get the same percentage.
At the end of the day, the Bank is the ultimate winner. But are you?
2. Set A Ratio For Your budget :
There is something called a budget ratio where you can divide your income into little segments. It can be 20:30:50, it can be 50:30:20, it can also be 25:25:50 or so on. So what’s this ratio all about? Technically, whatever you earn gets divided into three parts.
So your target in your 20’s should always be on how to reduce your expense, do moderate savings and invest the rest of it. Let your money work for you to earn your money. We will discuss it in the passive income section. The ratio of your Expense, Savings & investment should be set in such a way that it helps you to expense less and invest more.
We are not setting any ratio for you as every one of you has separate financial planning. Some of you need to spend more money on various things. But the motto is to reduce the money from savings and increase it in investments. There are many options to invest in, we will talk about that.
3. Have An Emergency Fund :
Yes, it’s extremely necessary. First, stop and think, where can you need money in case of an emergency? At a Hospital or an Accident. So cover them up with insurance. There are extremely balanced cashless insurance plans where every guy in the ’20s should invest his money into. Once that is covered, still have an account, preferably a separate one, where you keep some adequate money in case of some other emergencies.
Liquid cash is important which can be withdrawn within a couple of minutes any time of the day from any ATM. One who is looking for how to manage personal finance at ’20s should have an emergency fund built up slowly.
4. Credit Cards Are Okay Till You Use Wisely :
A credit card provides you credit for 45 days. And if a person repays back the amount he had swiped from his Credit card within 45 days, there are no extra charges, just the annual fee. Now if you are using a credit card, you must understand that banks will always push you offers to make you use their credit for a longer period of time so that they can earn interest from you.
You must remember, your credit card bill should not ever exceed half of your savings account debit balance. In case it gets higher, tries to pay it off as soon as possible. One must know how to limit his credit usage in order to know how to manage personal finance at ’20s.
5. Know About The Liability & Asset Purchases :
Whatever purchase you make in your life, most of them are liability expenses. This means, with time the monetary value of the purchase will decrease. Such as electronic goods. Whereas an asset purchase is that one where the monetary value of the purchase increases with time. Such as gold.
Now, of course, one will need both kinds of purchases in life, but try to make sure the asset purchases are more, and the liability purchase less. If you are finding how to manage personal finance at ’20s, this is one of the golden tips. Earlier the best asset purchase would have been landing & real estate, but now it is on-paper-assets like Govt. Bonds, FDs, SIPs and more.
6. Passive Income :
This is going to be so interesting, especially for the people of 2019 and after. What’s a passive income? Where you are not actively working by spending hours and hours, but still there’s a constant income being generated for you. That is passive income. Now if you’re finding How to manage personal finance at ’20s, it’s the perfect tip to prepare for your passive incomes in the early ’20s. One can only prepare for its passive income by devoting hard work, time & dedication to earning active income.
What is active income? Where you actually need to be live dedicating hours to the work and get it done. Like office jobs, businesses.
Once you start creating a saving from your active income, by the mid-’20s at most, one should start to invest deeply into passive incomes. Such as Mutual funds, Equities, Debentures, Business models, Blogging and more. After another ten years of channeling your money from active to passive sources of income, by 35 you should have enough freedom in life where your financial needs can be taken care of with your passive income if you plan it correctly. But the harsh truth is, you must dedicate your entire 20’s into your active income with hard work.
Q. What are the sources of Passive income?
- Create a business model, instead of running a business. A business model is an asset that will pay you for a lifelong period of time.
- Write books or e-books and sell them in Ecommerce websites. Once you enlist a book, for the lifelong it will pay you back if it’s worth it.
- Start an influencing channel, can be a blog, YouTube channel, social media page, any. Remember you must transfer your followers to all other platforms too.
- Affiliate marketing is an extremely good way to generate a passive income. In case you are a social influencer, it’s beyond great.
- Rent a portion of your house. Or use your active income to buy one space and rent it out. You can also use the Airbnb platform to rent out.
- Invest in Equity, commodity, and other paper assets. Always invest in the company’s potential and planning, not market price.
7. The final one, invest with SIPs. :
SIP is Systematic Investment Planning where every month or year, pre-decided money get debited from your bank and being invested in the financial market of equities and debts. Since not every of you behold good market knowledge, so your fund is managed by fund managers who make sure to minimize the risks at the least level.
www.sipcalculator.co is a website where you can find out how much you can make by investing into SIPs for how many years. One can start with as low as ₹500 a month. And you should start doing it since the very beginning of your 20’s. Start with low, then as your income increases invest more. The mutual fund gives you the benefit of compounding your money, which is unmatchable.
So in case you were looking for How to manage personal finance at ’20s, we hope you have got a clear vivid picture of how to do it. All the best!
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