Financial Planning for Millennials: A Step-By-Step Guide

Financial Planning for Millennials is a very important topic for people born between 1980s and 2000s. Planning now will help your future self financially and provide stability in your retirement phase. We will discuss 6 important tips on Financial Planning for Millennials in this article, including budgeting, tackling debt, building saving habits, investing smart and early, planning for retirement, etc.

1. Start with Budgeting

The first step towards your financial planning must be starting with a budget
Tracking Expenses: It is important to track expenses using a notepad or mobile apps that are available on play stores. This will help you to know what are the monthly expenses on average
Follow 50/30/20 rule: This rule states that 50% of your income must cover your needs or necessities such as rent, groceries, EMI, etc. which are actually needed to be paid, 30% needs to be used for entertainment and dining out purposes and remaining 20% must be allocated for savings or investments
Create an Emergency Fund: Emergency fund is the amount of money you allocate to cover for emergency needs or extreme needs, like hospitalization of self or any family member where urgent funds are required or similar situation. It is important to have Emergency fund in order to avoid asking someone else for money or going into debt

Following above 3 steps will ensure that you have taken the first step towards your financial planning. Next you need to tackle existing debt.

2. Tackle Debt Strategically

It is very important how how tackle debt for financial wellbeing
Due to society and peer pressure, we are forced to take loans such as home loan, car loan or any other personal loan just to cover the wants based on external society pressure.
You should be avoiding taking loans based on such pressure or for your status, because you are the one who will be paying the EMIs of those loans
Prioritize high interest rate loans: If you are already paying the EMIs for multiple loans, you should prioritize closing the loans with high interest rates first, since these are the ones that take maximum interest amount out of your EMI
Consider refinancing: If your existing loan is at high interest rate and other banks are providing you loan with lower interest rate, than you should consider refinancing or switching to pay less interest amount
You EMI amount consists of 2 components: Principal amount and interest amount. Maximum of the interest amount is taken during the initial stages of your loan, so consider having lower tenure of loans
Lower interest rate with low tenure will help you pay less interest amount and also close the loan as soon as possible.
Make Loan Prepayments: Home Loan Prepayment or part payment is the strategy where you reduce the principal balance in home loan to close your loan before time if opting for tenure reduction. This is an important step to save loan interest amount as well on your existing loans

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3. Build Strong Savings Habits

Savings habits are the one that will help you to sustain during your retirement phase and also to retire before time. Savings is more than just putting your money aside – it’s about creating financial safety
Automate Savings: You can automate savings using tools such as recurring deposit in your bank, based on which, a specific amount will be deposited every month in separate recurring deposit account, on which you’ll earn interest over time.
Use Tax Benefits Accounts: You can make use of PPF (Public Provident Fund) with tenure of 15 years or ELSS (Equity Linked Saving scheme) that invest in equities for tenure of 3 years, that also helps you to save income tax
Automated Emergency Fund: Start an automated emergency fund that will build up based on your savings habit. You should at least have 6 months to 12 months of expenses covered in such emergency funds

4. Invest Early, Invest Smart

For millennials, investing early is the keep step for long term financial growth. With time you’ll see the benefit of compounding.
For example, getting 1% on 1 lakh amount will give you Rs. 1000 as profit, but same 1% on Rs. 1 crore amount will give you Rs. 1 Lakh as profit. That’s 100 times more, where the percentage of returns is same
Now, to reach Rs. 1 crore, you need to start early. Don’t focus on high returns schemes over short term, but focus on building the corpus over long term to get better returns in future
Learn Investing Basics: You should know what are mutual funds and how SIP works? Investing early and systematically can help you be ahead of time and have a better financial stability over long term
Understand Risk Tolerance: Once you understand the basics of investing, you need to understand the risk tolerance and the risk you can take while investing
Go long-term: Lastly, you have to go for long term. Have financial goals with 5 to 10 years and start SIP for such goals. You’ll see the magic of compounding with time and also attain financial stability while achieving your goals

5. Plan for Retirement

Thinking about life after work is never too late. Start working towards your retirement phase from now, time will just fly!
Contribute to EPF or NPS: EPF (Employee provident fund) and NPS (National Pension System) are the important schemes that can help you get pension during your retirement phase. You can start investing in these schemes while you have starting working in a company as a fresher
Invest in Index Mutual Funds: You can start SIP in index mutual funds for next 25 to 30 years which can be helpful during your retirement phase apart from EPF and NPS that can provide you a cushion for financial health
Have Clear Retirement Goals: It is always better to have clear financial goals to achieve the required amount with a specific deadline. You should consider inflation rate as well, probably around 6% to 8% while planning for retirement as inflation is an important factor in such goals

ALSO READ: EPF Interest Calculation

6. Protect Your Financial Health

While it is important to take care of your health first before taking all these steps, you should also consider taking life insurance and health insurance
Life Insurance: In case of sudden death, the loans taken by you need to be paid of by your family. Life insurance comes into picture during such phase, where your loved ones will get lumpsum amount based on your life insurance, which will help them to clear the existing loans
Health Insurance: It is very important to have a health insurance that will help you to cover for medical expenses and hospitalization in case your health is not in your favor. Health insurance helps you to keep your emergency fund intact and also to save on bills from hospitals.

Conclusion

So these are some of the steps you should follow as millennials for better financial stability. Start with budgeting which includes tracking the expenses, followed by debt management, investing based on your risk appetite, building habit of savings in every month regularly, planning for your retirement phase and taking good care of your health.

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