World Thrift Day: A beginner's guide to saving and investing in your 20s

"The decisions taken in early 20s often lay the basis of an individual's financial planning and its benefits throughout their lifetime," says Ajay Shah, director and head- retail, Care Health Insurance. "Effective early management of finances enables one to explore and experiment for future financial security and stability," he adds.

Savings and investments often do not top the list of priorities for early career working individuals, who have just started "adult-ing" and are taking primary steps towards first managing their income. It is natural that they struggle spending money wisely initially, while not giving much thought to future financial emergencies as they live their day-to-day life. Depending on the caste and class privilege of an individual, the situations differ for many.

However, at a time when political and economic uncertainties have an overriding impact on personal finances in the current times, it is always useful to learn and practise managing money effectively early on; a crucial factor defining one's financial independence. While this proves to be beneficial for future or long-term goals, one must consciously adopt and maintain financial discipline to mindfully use the hard-earned money and be accountable for the future.

According to digital finance content creator Anamika Rana, learning about budgeting, saving and investing can set us up for long-term financial success and give us the independence to make informed financial decisions in the present. "With more options than ever before such as online banking and investing apps, it has become easier to manage our own money," she adds.

Common mistakes

Having said that, experts highlight a few common mistakes that young adults tend to make, which may cause a deficit by the end of the month with no security for emergencies if any. One such major mistake, Rana says, is not creating or following a budget. Not creating a budget, it is easy for people to overspend, without keeping a track of the money earned.

"Unexpected bills such as medical ones can wreak havoc on a budget, but having an emergency fund can provide some cushion in case of the unexpected. Not saving for such situations is another mistake," she adds.

Procrastinating about savings and investment plans thinking it is too early, is another misjudgement of situations in present times. According to Shah, managing spending patterns is prerequisite to regularising expenses and saving periodically for unforeseen circumstances in the future. He stresses on the fact that a formal saving process establishes a favourable credit history which is crucial in getting loans at nominal interest rates, in case needed in future.

Rana and Shah share essential tips on managing your monthly income, while saving or investing for long-term plans:

1. Establish a budget and stick to it. Figure out your monthly income and expenses, and allot a certain amount of money towards different categories like bills, rent, groceries and entertainment.

2. One can follow the 50-30-20 rule wherein the income is divided into three parts. At least 50 per cent is utilised for daily needs and necessities, 30 per cent for wants and 20 per cent is to be saved in various forms of investments.

3. It is also important to track your spending so you can spot any problem areas or potential ways to cut back on unnecessary expenses.

5. Finally, consider investing in yourself through education or starting a side hustle to increase your income over time.

6. Look for ways to cut back on everyday expenses, like cooking at home instead of eating out or finding cheaper alternatives to entertainment and leisure activities.

7. Research ways to lower bills and payments - for example, renegotiating your cell phone plan or shopping around for better car insurance rates.

8. Another way to manage finances includes ensuring you pay bills on time. This helps in avoiding late fees and also prioritises spending. This also helps an individual improve their credit score in the long term.

9. Consider setting aside a portion of each pay-check into savings, even if it's just a small amount. It adds up over time and can provide financial stability in case of emergencies.

10. Create a savings plan and set aside some money each month towards long-term goals like buying a house or saving for retirement.

11. Add your savings into a high-yield account so it earns interest while remaining accessible in case of an emergency. Saving money may not be glamorous, but implementing practical strategies can set you up for financial success in the future.

Do investment plans work for every young individual?

At a time when the Covid-19 pandemic and rise of cryptocurrency has boosted the culture of investments among the young as a security for health and additional capital requirement during events of emergency in the future, early career professionals are attracted to the discourse of investment in mutual funds, stocks and digital coins. The new-age intersection of digital tech and personal finance has particularly been a potentially lucrative prospect for many youngsters, who are increasingly investing in digital coins on their mobile phones.

"The power of compounding is the primary reason why every individual should start investing early in their careers. When an investor starts early, she can reach the end goal with much smaller investments than someone who starts late," says Edul Patel, co-founder and CEO of Mudrex.

While experts say early investment is essential for individuals, the conditions vary for people depending on personal factors such as income, expenses and financial goals. One has to bear in mind that investing may not always guarantee profits and that it is a long-term plan, allowing your money to gain some value over the years.

According to Patel, one of the common mistakes that young investors often tend to make is splurge on things that they feel would enable them to flaunt among their peers. "Although this tendency to spend on instant gratification is expected, these young investors often run out of money within the first few days of the month. It leaves them with no financial bandwidth to contribute to growing their investments," he adds.

Investing at the right time in the most-suitable plan is critical to gaining better returns. Given the risks involved with different plans, it is always advisable to consider your personal finances and consult a trusted financial advisor to curate your own savings or investment plan.

Here are some useful tips by Patel and Shah on investments:

1. Taking the investing route early is essential for every individual. People can start with as low as 100 bucks every month towards a systematic investment plan.

2. Start early and set up auto investments.

3. Do not follow any investment advice blindly. Follow due diligence and diversify your investments across different asset classes.

5. Individuals can take more risks in the early years of their careers as they have lesser responsibilities, regarding their investments.

6. For someone, who is just entering the market or wishes to avoid taking risks, recurring/fixed deposits can be a safe option. It will keep your money safe at a higher interest rate with an opportunity to liquidate funds at any given point.

7. Cryptocurrency and multi-cap stocks should be the ideal choices, apart from the less risky ones.

8. With the ever-growing cost of medical expenses, another method to save money in the future is by securing your health. One can get a personalised health cover and ensure comprehensive coverage and health security. Besides, a Health Insurance also helps save tax under Section 80D, which is up to Rs 75,000 on premium paid.

Also read: Monetary compensation, flexible work culture are what young employees look for