8 Crucial Financial Planning Skills That Every Young Adult Must Know

Financial planning may not be your top priority when you are young, earning, and free, particularly in the early stages of your career. After relying on parents for financial support for an extended period, the younger generation tends to prioritise splurging their hard-earned money on activities like travelling with friends, going to concerts, buying branded clothes and accessories, and so on, rather than focusing on financial planning.

Well, I did that too! This could be mainly because we have never been taught personal finance or money management in high schools and colleges. But, honestly, today, when I look back, I feel individuals in their twenties should understand the importance of financial planning and how creating a financial plan gives them more control over what their life may look like in 5, 10, or even 20 years. I don't want to sound like an oldie, but today's young generation has the resources to learn and explore everything they desire. Setting your financial priorities early in life will definitely help you instil good money habits that will go a long way.

Before we go any further, let's first understand what financial planning is;

Financial Planning is a comprehensive process that assesses an individual's current and future financial situation to help them systematically achieve their goals. It involves creating a roadmap for meeting all of life's expenses, including unexpected ones.

While your goals and priorities may shift over time, it is still better to begin with a financial plan and adjust it as needed based on changing priorities.

Here are 8 crucial financial planning skills that every 20-something must learn:

1. Setting Your Financial Goals:

Are you saving for your dream home or planning to start a family? Are you planning to start your own business, or are you planning to take a world tour? Establishing financial goals can provide you with the motivation to remain focused. Without a clear idea of what you are saving for, you are more likely to spend your hard-earned money on something that is not meaningful to you.

Your financial goals should be S.M.A.R.T (Specific, Measurable, Achievable, Realistic, and Time-bound). You should ensure that the time frame you establish to achieve each goal is reasonable and prioritise them as short-term and long-term goals.

2. Creating a Plan:

After determining your financial goals, you should be able to develop a strategy to accomplish them. Imagine the future you want and create a financial plan that aligns with your life's milestones like marriage, job changes, having kid/s, retirement, etc. It is a good idea to start with a three-year plan and then move on to additional goals. Be truthful with yourself and take the time to develop your financial plan.

Organise your goals in order of importance to determine which ones you should tackle first. It might be overwhelming to plan everything out at this stage in your life, but doing so can prevent you from squandering your time and resources on irrelevant or unnecessary ventures.

3. Developing a Budget:

Creating a budget is like a roadmap to monitor expenses and identify areas where discretionary spending can be reduced. When creating your budget, consider these three factors: Cash flow, Liabilities, and Financial objectives. Utilising simple and user-friendly budgeting apps or even an Excel sheet is one way to do this. Budgeting apps can help you track your income and expenses and also aid in saving money.

Budgeting can help you save more and establish financial discipline. Once you have started saving more, you can explore various investment opportunities that suit your goals and risk tolerance based on thorough research.

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4. Building an Emergency Fund:

In these uncertain times, having an emergency fund to cover unexpected expenses is crucial. As a young adult, you might still rely on your parents for emergency expenses, but this habit can create a dependency on others. Considering unforeseen circumstances like job loss or the emergence of new viruses, you should build an emergency fund.

It is ideal to have an emergency fund that can cover 6-24 months of household expenses, including loan EMIs. You can save these funds in a separate high-yield savings bank account or invest them in ultra-short-term or liquid funds for easy access and tax-efficient returns. Start building a significant emergency safety net as soon as you start working. The sooner you prepare for unexpected situations, the better.

5. Protecting Yourself with Adequate Insurance Coverage:

Before the pandemic, insurance penetration in India was relatively low, with young individuals showing little interest in insurance products and considering them unnecessary due to their youth. However, the pandemic has demonstrated the risks of being uninsured, and it is now essential to take care of yourself and your loved ones in unforeseen circumstances. Having adequate insurance coverage protects you from life and health-related risks and also helps you save money in the long run. Paying out of pocket costs more and can deplete savings, setting one back for months.

Having life insurance and health insurance is crucial when it comes to managing finances, as it assures the family's financial security in the unfortunate event of a loved one's death or a medical emergency. Not only do these insurance policies cover expensive medical bills, but they can also pay off any outstanding debt and offer many other benefits. Besides, when you buy an insurance policy when you are young and healthy, you lock in the low premium for a longer period.

There are various insurance policies available in the market, which can be chosen based on suitability. It is advisable to conduct careful research online through available sources. A family floater health insurance policy is suitable for a young couple with kids, while term insurance is the best option for life cover.

6. Creating a Diversified Portfolio:

To manage risk, optimise returns, and reach your financial objectives within the targeted period, diversifying your investment portfolio is a key strategy. Spreading your investments across multiple assets can lower your overall investment risk, improve your potential for returns, and provide stability in the long run.

Diversifying your investment portfolio may seem daunting, but it is actually a simple concept. The principle of not putting all your eggs in one basket applies here, as different investment avenues come with varying risks. One option for achieving long-term financial goals is investing in mutual funds, ideally through Systematic Investment Plan (SIP), to benefit from rupee cost averaging. To balance the risk associated with market-linked mutual funds, it makes sense to invest in less risky options that offer steady returns, such as bank fixed deposits, debt instruments and tax-saving schemes like ELSS.

7. Using Credit Cards Responsibly:

Credit cards can be beneficial for building credit history and improving credit scores if used smartly. However, many young adults habitually use their credit cards for all the big and small purchases. This makes them pay high interest charges and late payment fee, which can create a challenging situation of debt overhang that becomes impossible to come out of. Hence, it is crucial to learn how to use credit cards responsibly early on. You should pay off your monthly outstanding in full every month. Use your credit card only for purchases that you can afford to pay off quickly and avoid spending more than you earn. Click here to know more about how to use credit cards responsibly.

8. Educating Yourself:

To be financially healthy, you are required to continuously educate yourself about personal finance. The financial world is constantly evolving, and staying up-to-date with the latest trends, strategies, and tools can help you make informed decisions that will positively impact your financial well-being and shape your financial future.

You can educate yourself by reading financial news, blogs & articles and attending financial seminars and workshops organised by experts. You can also consider conducting online courses and certifications if you want to dive deeper into a particular financial topic. Furthermore, working with a financial planner can also help you educate yourself and receive tailored financial services.

To conclude:

Financial Planning is essential for young adults to set themselves up for a secure future. By setting realistic goals, prioritising their expenses, and investing in a diversified portfolio, young adults can build a strong financial foundation that will serve them well throughout their lives. It is crucial for you to educate yourself continuously about personal finance and develop healthy financial habits. By doing so, you can not only achieve your long-term financial goals but also enjoy a comfortable lifestyle and financial freedom. Remember, it's never too early to start planning for your financial future, so take charge of your finances today and enjoy a brighter tomorrow.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

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Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.