Last time we talked about why goals are the starting point for managing your finances. Some of our users don’t have goals in mind. This is especially true for young people who have just started their first jobs. For them, we suggest these three essential goals.

Build an emergency fund

The one thing financial planning experts agree on, is the importance of having some savings set aside for emergencies. What do we mean by emergencies? Basically, any large unanticipated expense such as job loss, illness, or home repairs. When we bring this up with users, we face a lot of resistance. It seems like a singularly uninspiring goal.

However, the same customers will then tell us about the times that emergencies prevented them from purchasing their dream home, or moving their child to a better school. Having an emergency fund is essential to ensuring you stay on track for the other, more glamorous goals.

How much should you save in this fund? Experts generally recommend three to six months of expenses. You can keep that in a saving account that is different from your main spending account. Why a separate account? It makes it far less likely that you will spend your savings.

Pay down loans, especially credit card debt

Credit cards have many benefits. They help you build a credit history. They can help you track your spending better. They have good rewards programs.

However, they come with hefty interest charges. We estimate that the average annual interest rate on credit cards in India is about 35%. In comparison, the top-performing mutual fund in India only gave 21% annual returns over the past three years.[1] It would be exceedingly rare for an investment to beat credit card interest rates. And more importantly, a mind free from the stress of loans, is a mind that can plan better for the future.

Start saving for the future

I know it seems silly to save for retirement. It is 45 years away! But investing early is the key to building long-term wealth. Let me make this concrete. Suppose you needed Rs. 1 Cr. for retirement at 65. If you started saving a fixed amount each month at 25, you would only need to save ~Rs. 8200 each month.[2] If you started at 35, that number would be ~Rs. 15,000. At 45, that would have ballooned to ~Rs. 1.2 lakh!

The above three steps are essential for maintaining a good financial standing in the long run. We hope you make use of them and start treading your path towards a successful financial journey.

[1] The L&T Emerging Businesses Fund. Souce: Value Research. Accessed at this link on 30th July 2018.

[2] Assuming long run equity mutual fund returns of about 13% per year.