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Importance of Financial planning for young professionals

 

 

Financial planning is important for young professionals to ensure sufficient funds to meet their goals, both short-term and long-term

 

LOOK after the pennies, and the pounds will look after themselves.

   The age-old adage highlights the importance of the habit of saving for a rosier tomorrow. And with the domestic economy booming and jobs mushrooming across diverse service and financial sectors, like BPOs, brokerage houses, media and telecom, young professionals are earning increasingly attractive packages. As per various estimates, nearly 3 to 5 million youth under the age of 25 years enter the workforce each year in our country, and for them it becomes important to quickly get in place a financial plan. This would help to ensure that these young professionals have sufficient resources to meet both their goals.

PLAN EARLY:

As part of the strategy, one needs to draw up a budget, and take into account the monthly expenditure for a single person, living either with his parents or independently. These would include rent (if one is living alone), groceries, transport and allied costs, coupled with other incidental expenses. Also if one is living in a flat independently, one would need to buy furniture and other necessary items. Financial planners argue that for a young professional under the age of 28 years, and earning say 35, 000 – 40, 000 per month, could typically save 15-18% of his income in various instruments.

   These could include instruments like shares, mutual funds, ULIPs and more secure instruments like fixed deposits in banks. However, financial planners say that for the "younger" workforce, they could take a more aggressive approach as they have comparatively fewer responsibilities at this stage of life.

MEETING ONE'S GOALS:

A young person may find it easy to get a job, but in the event of a downturn in the economy or his sector, he may be the first to be laid off. To ensure that he has sufficient resources during a possible lay-off period, young professionals need to ensure that they have a contingency fund in place. Lay-off periods can be up to 3 months for younger professional, and to build this corpus, typically requires 5% of a person's monthly income to be set aside, in safe instruments, like fixed deposits or debt schemes of mutual funds. A young professional also has longer-term aspirations, like buying a house, getting married and starting a family, coupled with holidays overseas. And each of these objectives requires a substantial amount of savings, especially in the case of buying a home in metro cities, where property prices are close to their all-time highs. To meet these goals, financial planners argue for investment in equities, directly or indirectly, through mutual fund units or ULIPs becomes key.

   As a result, financial planners reckon that one could set aside 8-9% of his total income for investment in shares and allied instruments. In addition, a small portion of ones income could be put in safe instruments. In the table above we have taken three salary brackets for individuals. We have proposed the amount that one should keep aside from his savings to build the contingency fund. The table further provides both an aggressive and a conservative investment strategy for investors to chose from and expected returns under each strategy.


   However, for young professionals who are married, they would also need to consider purchasing a term insurance policy, to meet any unfortunate demise. This policy can be purchased at substantially lower premiums when one is younger, say financial planners. Young individuals have to learn to avoid unnecessary expenditures and invest wisely for the long term. Clearly, while the first few years of one working life are the most enjoyable, one would also need to ensure that one has a long term financial plan to meet ones goals.

 


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