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How you Should Invest in your 20s?

dateKnowledge Centre Team dateAugust 02, 2022 views214 Views
Investment in your 20s | Investment Strategies

Investing in your 20s is just like spending in your teens, exciting, confusing and full of uncertainty. The big question thus, would be, ‘how should you invest in the 20s?’

You will not get another chance to live through this period of fun and freedom again. Should you be frugal or go on a spending spree? You are at a pivotal junction and will never realize the freedom you have in hand until you retire The 20s is the ideal age to begin investing because you have time on your side. You can benefit from the magic of compounding.

Starting early has several advantages. You will have the luxury of time to take risks and reset if you make mistakes. The margin of error should, however, reduce with time. Some of the benefits of investing in your 20s are listed below:

1. The Power of Compounding:

The more you save, the more you make. The power of compounding means reinvesting the interest you get from invested amount instead of spending it elsewhere. For example, if you invest Rs 100 with 7% interest per annum, the interest would get added to Rs.100 and the total amount would become the new principal.

2. Beating Inflation:

Inflation keeps varying over some time. Investing in different asset classes is necessary to earn inflation-beating returns and also generate wealth.

3. Additional Income:

When you start investing early, you start reaping the benefits early on. You will get returns in the form of interest, dividend, capital gain etc.

Also Read - Dividend Distribution Tax (DDT)

4. Good Debt:

You can avail a home loan and invest in a property that is expected to appreciate in future. Investing in property using bank credit requires margin money. Save enough for this margin money. Home loans also have tax benefits.

5. Systematic Investment Plan (SIP):

Investing in lumpsum is not always possible for everyone. If you start early, you can invest smaller amounts over a longer-term. Besides the advantage of investing in smaller amounts, you benefit by spreading the risk. You will gain from the highs and still stay afloat during the lows in the market.

Know if investing in a SIP is a good idea?

Investment Goals in the 20s

You have several dreams and aspirations when you are in your 20s. However, there are a few that are common for all youngsters and generally top the charts:

1. Car:

The car continues to be a status symbol and is a sign of a modern upwardly mobile professional. Besides the social prestige, a car is also considerably safer than a 2-wheeler, especially in Indian megapolis. Therefore, buying a car is always a priority for someone who has just begun his/her career.

2. Home:

If you are planning to avail a home loan, then doing it early has an advantage. You will get a longer tenure for repayment. The principal and interest components of the loan have tax benefits as well. Needless to say, you will also benefit from the appreciation in prices of this property.

3. Wedding:

Once you are employed and have worked for a few years, it is natural to think of marriage. Indian weddings are an expensive affair because you want all your friends, relatives and well-wishers to be part of this joy.

4. Vacation:

All work and no play, makes Jack a dull boy. This adage holds good for everyone. Annual vacations, time off from work etc are indeed important for your overall well-being. You may have even listed out your dream destinations.

5. Retirement:

Retirement is one of the most important financial milestones in your life. Given today’s high-speed and stressful work environment, you would want to end it early and go on your journey to explore the world. Starting your retirement savings early helps you with this goal as you can invest for the longer term, take more risk and expect a higher rate of return.

6. Wealth:

Conventional financial instruments such as term deposits are rarely helpful in generating wealth. Equities outperform all asset classes in the long run. Allocate a large portion of your money in equities when you are young. You will reap the rewards because the returns beat inflation as well as get returns better than other investments.

Click Here To Learn - Best Ways to Invest Money

Where to Invest in your 20s?

Once your financial goals are clear, you must explore avenues to invest your hard-earned money. This investment should be diversified, comprehensive and take care of your and your family’s needs in the short, medium and long-term. Key options are listed below:

1. Term Insurance:

This is the first and foremost plan that you must opt for. It mitigates against possible loss of income due to your untimely demise. A term life plan pays out the sum assured to the beneficiary in case of the policy holder’s death. Term life plans are safety nets and will give you peace of mind that your family will continue to sustain you even if you are not around. Critical illness add-on riders give a lump sum amount (in addition to the base sum assured) on the diagnosis of any of the listed illnesses. Term insurance premium amounts can be deducted from taxable income under section 80C.

Reasons to Buy a Term Insurance Plan

2. Reasons to Buy a Term Insurance Plan:

Health insurance is much needed in today’s times when healthcare costs are spiralling and newer ailments are affecting people. A comprehensive family insurance plan will cover most hospitalization expenses. You do not have to dip into your savings to pay those exorbitant medical bills. Health insurance investments are deductible, from taxable income, under section 80D.

3. Equity Linked Savings Scheme (ELSS):

Mutual funds are focused on specific industries or stock indices. You can choose the fund depending on your risk appetite. ELSS is a mutual fund with a lock-in period of 3-years and is eligible for a deduction from taxable income under section 80C.

4. Unit Linked Insurance Plans (ULIPs):

ULIPs are a step ahead of ELSS. Even the returns from ULIPs are exempt from tax under section 10(10D). ULIPs like Invest 4G from Canara HSBC Oriental Bank of Commerce Life Insurance can become your portfolio jam:

a) Invest in a mix of equity and debt funds
b) Use automated asset allocation to benefit from market volatility
c) Enjoy free bonus unit additions when you invest for more than 5 years
d) Superior liquidity with partial withdrawals allowed after five years

5. Public Provident Fund (PPF):

PPF is a Central Government guaranteed investment cum tax saving instrument, offering a 7.1% rate of interest. The amount deposited in PPF accounts is deductible, under Section 80C, from taxable income whereas all withdrawals are exempt from taxes. Partial withdrawals are permitted only from the 7th year onwards.

6. National Pension Scheme (NPS):

NPS is a pension scheme that is exempt from taxes both at maturity and annuity (up to 40%) stages. You must try and invest at least 10% of your income into NPS to build a corpus for your retirement. On retirement, you can withdraw 60% of this corpus and opt to get a pension from the balance of 40%. Contributions to NPS are also deductible, under sections 80C section 80CCD(1b), from taxable income.

Mistakes to Avoid While Investing in your 20s

Do not re-invent the wheel. You do not have to make mistakes to learn from them. You can learn from the mistakes that others have made and there is plenty of information on common mistakes that people make. Some of them are listed below:

1. Living Without Budget:

You may end up overspending and not saving a penny. It may also happen the other way round. You may invest almost all your income, not leaving any funds to manage your living expenses.

2. Being Credit-Wise:

Relying on debt for lifestyle expenses can land you in a soup sooner or later. You should work on building prudent financial habits in your 20s. Try building your credit score by using small debt like credit cards within your repaying capacity. Your lines to avail credit should remain open for emergencies. A good credit score helps a lot in this direction.

3. Crossing Limits of Frugality:

Being frugal is good. But depriving yourself of even basic needs is not a great idea. Maintain financial discipline, however, do spend money on healthcare as health is the ultimate wealth. Simultaneously, have health insurance policies to avoid draining your pockets in-hospital emergencies.

4. Add Skills in Free Time:

Moonlighting is no longer a taboo. It helps you build additional skills at an early stage in your career besides earning additional income.

Enjoy the most important phase in your career. However, do not lose track of financial prudence. Invest wisely and reap rewards. Although, there is no perfect age to start investing, starting early allows you to take advantage of market movements. You also have scope to make corrections if at all you commit any mistakes.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

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