Young adults often avail credit for immediate consumption or saving for short-term financial goals. However, as financial decisions taken during the initial stages of your adult life can determine your long-term financial wellbeing, it is equally important to adopt the following moves to build a solid foundation to your financial life:
Maintain Adequate Emergency Fund To Tackle Unforeseen Exigencies
Having adequate emergency funds comes handy during financial emergencies arising from job loss, prolonged illness, disability or other unforeseen circumstances. It also helps prevent exhausting your investments for long-term goals, or availing of loans at a much higher interest rate.
Your emergency fund should be adequate enough to meet your unavoidable monthly expenses like your daily expenditure, utility bills, existing EMIs and SIPs, insurance premiums, rent, etc for at least six months.
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Given that financial emergencies can strike any day, park your emergency fund in high yield savings accounts so as to enable instant withdrawals. Those comfortable with mobile and/or internet banking can also park their emergency fund in high yield fixed deposits of scheduled banks.
Prioritize Purchase Of Term And Health Insurance
The primary objective of buying a life insurance policy is to provide a replacement income to various dependents in case of untimely demise. Ideally, your life cover should be at least 15 times your average annual income. You might prefer term insurance over other life insurance products as they provide a large cover for very low premium.
Also, buy health insurance policies with adequate coverage to reduce the risk emanating from rising healthcare costs. While many employers cover their employees under group health policies, they are usually inadequate for hospitalisation costs. These policies also lapse as soon as one switches jobs, leaving them without health cover till they get covered through another employer-provided health cover.
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Prepare A Financial Plan
Draw out a financial plan keeping in mind your crucial financial goals, as per the cash flow, investment horizon and risk appetite. Doing so would not only give a direction to your investments but also helps in creating optimal asset allocation strategy to reach your financial goals. First, estimate the amount required to attain each goal, its presumed rate of return, time horizon left to achieve the goal(s) and inflation. Then use online SIP calculators to evaluate monthly contributions required to achieve set financial goals.
Begin Investing Early Through SIPs
Aim to begin investing as early as you can, especially for your long term financial goals like building corpuses for your post-retirement life or child’s higher education. The earlier you do so, the more time your investments would get to grow and thereby, benefit from the power of compounding. Prefer the SIP mode of investment as it instils financial discipline through regular investment of predetermined amounts at periodic intervals. SIPs also ensure rupee cost averaging by purchasing more units at lower NAVs during falling markets. This also eliminates the requirement of monitoring markets and timing your investments.
Build Credit Score For Higher Loan And Credit Card Eligibility
Lenders usually prefer to lend or issue credit cards to those with a good credit score, usually 750 and above. With lenders increasingly resorting to risk-based pricing, they have also started offering preferential interest rates to those with higher credit scores. Hence, having a good credit score would not only increase the chance of availing credit facilities, it can also help in reducing your cost of credit.
New to credit individuals can build a strong credit score by using credit cards while ensuring disciplined usage and timely bill repayment. Those who fail to obtain regular credit cards owing to low or no credit score, risky job profile, insufficient income, unserviceable location etc. can opt for secured credit cards to build credit history. These cards are similar to their regular counterpart in all aspects, except for the fact that they are issued against your fixed deposit.
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The author is the Director of Paisabazaar.com
DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.
