How Can Young Adults Achieve Financial Freedom?

In simple terms what you want is Financial Freedom. Which has many definitions but to put it simply, it's about having enough money to live the life you want and choose how you spend your time.

That said, financial freedom is a concept that’s alien to young adults. You’re taught Plato, Joule’s Law, or theoretical economics but rarely about what to do financially in your 20s.

Or, you may be worried about exhausting the modest pocket money you get by investing in the supposed high risk, complex markets that you’ve heard scary stories about. 

Either way, there’s one thing you need to know - investing in your 20s is important to grow your wealth for future ambitions and unlock financial security. 

Moreover, you’ll notice that saving & investing isn’t as scary as it is made out to be if you have the right financial education.

That’s what we’ll explore further in this story with u

How Can Young Adults Achieve Financial Freedom?

In simple terms what you want is Financial Freedom. Which has many definitions but to put it simply, it's about having enough money to live the life you want and choose how you spend your time.

That said, financial freedom is a concept that’s alien to young adults. You’re taught Plato, Joule’s Law, or theoretical economics but rarely about what to do financially in your 20s.

Or, you may be worried about exhausting the modest pocket money you get by investing in the supposed high risk, complex markets that you’ve heard scary stories about. 

Either way, there’s one thing you need to know - investing in your 20s is important to grow your wealth for future ambitions and unlock financial security. 

Moreover, you’ll notice that saving & investing isn’t as scary as it is made out to be if you have the right financial education.

That’s what we’ll explore further in this story with useful financial tips for young adults. 

#1. Save First, Splurge Later

Most of us want to have cool and modern things regardless of whether they’re essential to us. However, it is important not to get into the trap of fitting in or showing off. 

It's okay to not buy that new iPhone, it's okay to not eat at expensive restaurants, or buy that new Amazon Echo. But the thing is, splurging unnecessarily is a one-way ticket to poor financial health. 

The sooner young adults can understand this the better because it’ll help you:

• Save money
• Invest more
  

In fact, saving & investing your money first for a consistent amount can allow you to buy cool things later with the profits. Let’s understand this with an example. 

Mr Cool Beans wants the latest Amazon Echo that’s priced at ₹7,999.00. Mr Beans earns pocket money of ₹5,000/month. But Mr Beans doesn’t cripple his finances to buy the Echo which is 1.5x his pocket money. 

Instead, he invests 30% of his pocket money every month through a SIP in an international mutual fund with 12% returns that invests in Amazon. Let’s see his money grow:

Mr Beans can use his profits to buy Amazon Echo in less than 3 years if he chooses. Beyond this, Mr Beans learns certain important financial lessons:

• Patience = good financial health
• Delayed gratification > instant gratification
• Self-made > taking on debt (loans)

#2. Research = Confidence

Doing in-depth research into your investment options (for the present and the future) can allow you to control your financial future. Above all, it can help you sniff out those who want to mislead you. 

That’s because it’s not uncommon to see unqualified friends, acquaintances, and relatives hand out (improper) financial tips for young adults. It may lead to bad financial decisions. 

Instead, you can start from the basics like learning what a mutual fund is and why the management quality of a company impacts its stock. As they say, forewarned is forearmed. 

#3. Keep A Track Of Your Finances

You can’t earn an infinite amount of money but you can spend it. It’s preposterous but adults can tell you how money can simply vanish or get halved as soon as a paycheck is credited. 

The root cause? Expenses, first and foremost, but also the inability to track those expenses. There’s an effective way to solve this by sticking to and drawing up a budget.  

Draw up a budget every month and allocate money broadly for needs, investments, and wants. The 50-30-20 rule can help you with it. Once you’ve done that, keep a track of your money so that you can:

• Ensure you don’t incur debt
• Manage recurring expenses
• Make small tweaks in spending habits
  

Developing a keen eye for detail will help you later on in life when your income, expenses, and investments increase exponentially to a point where you must remain diligent to avoid overspending. 

#4. Setup An Emergency Fund

There are two important funds that a young adult should focus on building - the emergency fund and the F-you fund. More on #2 later. An emergency fund can help you navigate through a rainy day. 

It must have high liquidity so that you can withdraw/redeem your money in 24-48 hours. Furthermore, emergency funds are generally low-risk investments like liquid funds. 

You can treat an emergency fund like a non-negotiable monthly expense so that it can become your fallback option in case of a health emergency or a period of financial uncertainty.  

#5. Start Saving For Retirement

You must be thinking, “This is crazy! I’m too young to even be thinking about retirement!”. But saving for life after retirement is essential because not everyone will have the luxury of getting a pension.

Being young gives you a headstart in that journey. Investing an amount as low as ₹500 every month when you’re a young adult to when you turn 60 can help you save up a substantial amount.

You can, of course, periodically increase the amount you’re investing for retirement as you approach 60. Long story start, a decade’s head start with as little as ₹500 every month can go a long way.

#6. Know Your Taxes

We’ve spoken about how to manage money in your 20s as a young adult. But there’s a particular concept in it that everyone dislikes mostly because it’s:

• Complex
• Tedious
• Costly
  

No points for guessing - it’s called “tax”. Because you’re reading this article, it’s safe to assume that you want to invest your wealth. This means you’ll have to stay on top of two types of taxes:

• Income tax: paid on earning a salary
• Capital gains tax: paid on earning gains from investments
  

If you’re earning pocket money (less than ₹2,50,000) you’re generally safe from income tax. But later on, you’ll have to know what your taxable income is once you earn a salary. 

Next, keep a tab on the gains that you earned on withdrawal. You’ll have to pay: 

• Short term capital gains tax if you held the investment for less than 3 years
• Long term capital gains tax if you held the investment for more than 3 years
  

You must also understand that there are responsible ways to save tax by investing in health insurance or certain mutual funds like ELSS funds. More on that here: 

#7. Health Is Wealth

Your health is the biggest asset that you’ll ever invest in. Ensure that you protect it by eating well, working out, and getting enough sleep. Top it off by getting solid health insurance that covers everything.

Avoid investing in weak assets like ULIPs that conflate gains with health. They’re not the answer to how to earn money in your 20s and protect health. 

ULIPs end up not being good at delivering for either health or your portfolio. Moving on, know that health insurance premiums can be used to offset tax under Section 80C.

#8. Protect Your Assets

After you’ve got solid health insurance, it’s time to insure other aspects of your life because you’ll be working hard to earn the money that pays for them.

Broadly speaking, these are types of insurance you can get in India:

• Motor insurance: for your car or two-wheeler
• Home insurance: for your home(s)
• Fire insurance: in case a fire breaks out
• Travel insurance: for when you travel with family

Conclusion

The financial tips for young adults mentioned above cover 8 crucial pointers that can help you start your investing journey on the right foot. Investing requires patience and there may be ups and downs.

But remember - saving & investing is the only way to secure a better future for you and your loved ones. Don’t forget to enjoy what you do financially in your 20s!  

Read these articles to get a basic working knowledge of investments:

1. What Is A Financial Investment Portfolio?

2. How to Build the Perfect Investment Portfolio

3. What Are Alternative Investment Options In India?