Unfortunately, schools do not teach us how to manage our finances. And even if someone had told our younger selves that we needed to save more, we would have ignored their advice and spent our money anyway.
But now that we are wiser (hopefully), we should know how to plan our finances well.
You should seek advice from experts like Mainstar Trust while making investment decisions because experts can help you steer the ship better. Nonetheless, the fundamental knowledge of personal finance would help you secure your future better.
Step 1: Become Debt-Free
It is difficult to create wealth when a massive chunk of your income goes toward paying off your debts. Your goal should be to become debt-free as soon as possible. In your 20s, you can work extra hours to pay off your student and home loans (if you have any) early.
Only think of getting an auto loan if it is necessary. Public transportation is great for commuting when you have outstanding debts. Also, be very careful with your credit card spending, as they come with higher interest rates. Once you get out of all the debt, you can focus on generating wealth in a more streamlined fashion.
Step 2: Create an Emergency Fund
Life can be full of surprises, and not all are pleasant. You should create an emergency fund to save yourself from unexpected crises like a health emergency, the loss of your job, or a global crisis (COVID-19). The idea is to save enough to cover your fixed expenses (food, rent, water, etc.) for three to six months.
As the name suggests, emergency funds are for emergencies. So, avoid spending money from the fund unless there is an emergency. Also, increase the amount of emergency funds over time. A fund set up in 2023 may be needed more than five years later.
Step 3: Get Insured
While emergency funds are a form of insurance, you should consider investing in a few conventional insurance plans. Insurance protects you from huge expenses that can spoil your wealth creation goal. To secure your future financially, you need:
- Health insurance
- Home Insurance
- Motor insurance (if you own a vehicle)
- Life insurance
Apart from these essential insurance policies, several other plans protect your life’s specific aspects. You should consult a finance expert to understand these insurance plans better.
Step 4: Save for a Better Future
Once you have cleared your outstanding debts, created an emergency fund, and gotten the necessary insurance plans, you should start saving for your older self. Some people want to retire early and enjoy life on their terms. If you want the same, you need to save significantly. In other words, you need to keep your expenses in check.
Even if you want to work until your 50s, saving a generous portion of your earnings for tomorrow is a good idea. Pension-specific investment options are available nowadays, and you can get significant returns after a certain period. The great thing about investing is that the earlier you start, the more returns you can earn.
Step 5: Invest in the right assets:
In their 20s and 30s, people usually make certain impulsive purchases that jeopardize their personal finances. If you do not travel much, buying a car may not be a good decision for you.
Things like cars, electronic appliances, and flashy clothes are liabilities that lose their value over time. Unless you are going to use it regularly, it is better to use the money somewhere else. Investing in real estate, on the other hand, is often considered a smart move as the value of such investments grows with time.
Wrapping it up
Personal finance is easier than people think. You only need to be wise about where you put your earnings. However, saving can only take you so far in your journey toward wealth. Once you secure your future with all the above-mentioned steps, you should start looking for various avenues to earn more. That way, you won’t have to compromise on what makes life worth living.
