Download digibank Now
A handy budget guide for young adults to manage finances effectively.
For most young adults, the 20s are a transitionary time. It is typically a time when you have just graduated, are freshly employed, and tasting the joys of financial freedom. While there is nothing wrong with enjoying your new-found financial independence, your 20s also mould your financial future. Based on the choices you make, you may either become an impulsive spender or an informed investor, on the way to build your fortune. It is thus vital to learn how to budget in your 20s. Here is a handy budget guide for young adults.
It is said that money grows from money. What you save and invest today, helps you grow your corpus tomorrow. By following a budget and sticking to it, you can manage your money, invest it and channel it to grow manifolds. By cutting corners in the early years of your life, you can imbibe financial discipline that allows you to enjoy the fruits of your labour in the later years. With budgeting, you can fulfil your time-sensitive goals like buying your first car or house or building a business from the ground up. You can also save yourself from falling into a debt trap.
As a young adult, you can benefit from employing these simple money tips for your 20s that helps you pave the path to financial freedom as the years go by.
Having clear financial goals means having a purpose for your budgeting efforts. Begin by labelling short-term, medium-term, and long-term objectives, such as paying off debt, saving for a vacation, or purchasing a home. Assign realistic timelines and monetary values to these goals. This clarity helps you allocate your income effectively, prioritize your spending, and stay motivated to stick to your budget.
The first cardinal rule of setting up a budget for young adults, is to start investing at the earliest. Today, you can invest in various kinds of Equity and Debt instruments, such as with Systematic Investment Plans (SIP). This simply means that you can invest a fixed amount in monthly instalments. Both SIPs and Recurring Deposits are excellent instruments that enable you to save in smaller instalments. You can also automate these expenses, i.e., set up standing instructions and inform your bank to debit the applicable, fixed amounts from your account to the dedicated investment accounts.
After working hard all month, you may be tempted to indulge, and rightly so. While you set aside a budget to pamper yourself, you should not neglect your long-term goal of creating your corpus. You must therefore divide your budget into three parts. These include mandatory expenses like rent, loan EMIs, insurance premiums, utilities, etc., leisure spends like social outings, dining out, vacations, etc., and savings and investments. You can follow the 50/30/20 rule, wherein you spend 50% of your salary on your needs, 30% on your wants and 20% on savings.
A monthly spending plan is important for effective budgeting. It involves categorizing your income into essential expenses, discretionary spending, and savings. Track your spending habits to identify areas where you can cut back and allocate funds more efficiently. Tools like budgeting apps or simple spreadsheets can help you monitor your progress and ensure you’re staying within your planned limits each month.
Most young adults have Student Loans to repay. If you are one of them, you should ensure you consider your loan EMI as part of your budget. The faster you repay your loan, the more it makes you credit-worthy and eligible for other loans in future such as Vehicle Loans, , etc. Repaying your loans without defaulting also helps enhance your credit score and makes you eligible for Credit Cards, which, if used prudently, assist further with savings and money management. One way to become debt-free quickly is to use the variable pay component or annual salary bonuses to repay EMIs.
Download digibank to open your savings account and begin your journey to making successful investments.
Another simple financial tip for your 20s is to maintain two separate accounts – one in which you deposit every rupee you can save, and another through which you manage your everyday expenses. Doing this can help you stay within your budgets and prevent you from overspending or making impulsive purchases. The can serve as a nest egg that helps you fulfil goals like creating a downpayment for your first home or vehicle. It can also serve as an emergency fund. Additionally, once you save a sufficient amount, you can invest in securities like interest-generating that you can easily liquidate when needed.
Your 20s may seem too early to think about retirement but starting early gives you the edge. You can consider speaking to a finance expert for budgeting and money tips for your 20s. They can help you park your money in multiple schemes and you can reap the benefits when you retire. For instance, you can invest in the National Pension Scheme (NPS) and earn a fixed sum upon retirement. If you start saving early for your retirement, you can secure your future with steady savings and investments and build a retirement fund consistently without feeling burdened.
Besides investing in wealth-generating securities, you must dedicate a part of your income to invest in instruments that help fight long-term inflation. For instance, a health scare can impact your savings significantly. But, if you invest in health insurance as a young adult, you have to pay smaller premiums to get higher coverage, along with the benefits of a no-claims bonus that helps enhance your sums insured. You can also buy life insurance (in EMIs) and secure your young family’s financial future in your absence, should something untoward happen to you.
Automating your savings is a simple strategy to maintain constant financial growth. Setting up automated transfers from your primary account to a separate savings or investment account takes away the impulse to spend the money elsewhere. Many banks and applications have features that let you schedule these transfers. This strategy not only helps you stay disciplined, but it also guarantees that your savings grow consistently over time. Automated savings are ideal for long-term goals like creating an emergency fund, investing in a retirement plan, and more.
An emergency fund serves as a financial safety net in the event of unexpected situations such as medical emergencies, job loss, or urgent house repairs. Ideally, this money should cover 3-6 months of necessary spending. You can start by putting away a percentage of your salary each month to a designated account, gradually increasing it over time. Keep this investment conveniently accessible, such as in a high-yield savings account. Having an emergency fund not only gives you peace of mind, but it also keeps you on track of your financial goals during times of difficulty.
Explore opportunities to enhance your earning potential, such as taking up freelance work, learning a new skill, or seeking promotions at your current job. Passive income streams, like dividends, rental income, or monetizing hobbies, can also contribute to financial stability. By diversifying your income sources, you can allocate additional funds toward investments, debt repayment, or achieving your long-term financial aspirations.
A good credit score is essential for accessing loans and favorable interest rates. Pay all bills, including credit card dues and loan EMIs, on time, and keep your credit utilization low. If you're new to credit, use a secured credit card responsibly. Regularly monitor your credit score to address any discrepancies and maintain financial credibility.
Budgeting in your 20s is not as complicated as you may have once thought. Today, you can use online and mobile apps to manage and track your budgets. Once your savings grow, you can also consult a financial planner to help you invest in alternative investment products so that you can start achieving your various time-based goals efficiently.
*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.
