You are single, young and earning a handsome salary. All in all your life is worry free and you are enjoying it to the hilt. As there are no responsibilities on your shoulders you do not plan for things. You like spending and maintaining a good lifestyle full of monster bikes and expensive vacations. But this worry free present should not prevent you from doing a long term financial planning as you never know what’s going to happen tomorrow. If you have a prosperous present, it’s wise to take few steps which will keep your future secure too. The planning should be such that even if the time takes opposite turn you are not bereaved of the living standard you are maintaining today. Let’s focus on some dos and don’ts you should focus on as a single individual.
Your current status
Few assumptions which I am making are you are in twenties and your salary growth will be 12% per annum. You will retire at the age of 55 and inflation will be round 7% per annum.
Let’s start with the Dos
Don’t fear spending
Don’t shy away from pursuing an expensive hobby. Unless you spend you will not get motivation to earn more. 20% of your total monthly income should be used to keep you satisfied and happy. Enjoy the bike ride; go for photography or any other activity you are passionate about.
Do not be risk averse
You are young and age is by your side. Debt investment is for old people who don’t have time by their side. Maximum of your saving should go towards equity. Equity investment is risky but in long run it giver the best returns. If you invest in some good stocks they will take care of your entire future capital requirement. Golden rule is, subtract your age from 100 and allocate that percentage of your earning to equities.
Stay in Cash
Say world falls back to recession once again and you lose your job. In this volatile market, no job is for ever. Be in cash so that you can sustain your standard of living up to next six months without earning a penny.
Some common mistakes you should avoid – Don’ts
Spending is good but getting into a debt trap is bad. Spend within your limits. Your limit is the credit card bill which you can pay in full every month while serving all your financial obligations. Mind you - you cross the limit the day there is unpaid balance left on your credit card.
Don’t increase you debt
Don’t invest in long term debt beyond your means. One car and one home is more than enough for debt payment. Owning another house on credit seems to be a bad idea. Just imagine the situation when you have no job, how you are going to pay the installments.
Invest in future
One day you will not be single and responsibility free. It’s better to do some advance planning for that day. You can roughly calculate the time frame in which you plan to marry and have a family. Capital requirement at the time of marriage and later on the child education is huge. If you don’t plan for this investment in advance you might be in trouble at that time. Start allocating funds towards these future requirements. The job is not tough as the power of compounding is on your side.