Personal Finance

5 Healthy Financial Habits for Young Professionals to Develop Early

It's never too early to start developing smart financial habits. We've summarized 5 key areas to focus on for those beginning their careers.

Just as we all have different diet and exercise habits, we also all have different financial habits. As one begins one's career and potentially starts making money for the first time, it's important to develop financial discipline. These practices can help one save and earn money wisely throughout life.

Develop a Personal Budget

It is important to know how much one can afford for each expense category. Creating a budget based on income and expenses allows for the setting of weekly, monthly and annual spending and saving goals.

The "50-30-20 Rule" is a common budgeting method with broad guidelines. The rule states that 50% of one's post-tax income should be used for essential spending categories, such as groceries, housing, utilities and transportation. The next 30% of one's income can be used for discretionary spending on things like entertainment, vacations or new clothes. Finally, the 50-30-20 rule advises that 20% of one's income should be reserved for savings and debt repayments.

It is important to note that the 50-30-20 rule is only a guideline to help initiate good budgeting practices, but a specific person's expenses may not fit neatly within these buckets. One can set limits that make sense for one's unique expenses, and these limits could gradually improve over time. Last, although it's important to think of all possible expenses, unexpected ones can always come up. If one's income allows for it, try to allow for some extra buffer to cover the unforeseen.

Use a Credit Card, But Avoid Credit Card Debt

Taking advantage of credit card rewards programs can save the average consumer thousands of rupees annually. In addition to these savings, using a credit card helps individuals build their personal credit histories and credit scores.

Credit cards issuers charge a very high interest rate of about 41% on average in India. So, cards should be used for expenses that can be paid back quickly to avoid quickly accumulating debt. Most banks allow one to make automatic payments each month to avoid accidentally accumulating debt. This is a helpful feature, but it is crucial to have enough money in one's linked account to cover the entire month's bill.

Pay off Loans

If one has accumulated student loans or other types of debt, it is important to begin paying them off as soon as possible. Compound interest, the concept of charging interest on interest, can cause one's loan balances to grow overtime if left untouched. Thus, paydowns are even more important for those with large debt burdens. It would be prudent to make a plan for regular repayments with a calculated date in mind for when the debt would be completely paid off. This will keep one organized and motivated to get to the finish line while minimizing surprises.

Open a Savings Account and Contribute Regularly

Opening a savings account allows one to track and segment savings from the cash needed for everyday expenses. It is important to consistently save money, even if the contributions are small at first. This helps in building an emergency fund for unexpected expenses or saving for a large future purchase. It also helps one immediately get in the habit of spending less than one earns and saving throughout one's career.

Start Investing Early

After budgeting expenses, planning debt paydown and saving, starting to invest early in one's career is highly beneficial. This habit can yield great returns over a long period of time due to the power of compounding returns on investment, which works the same way as compounding interest on debt. As an illustrative example, an individual that starts investing 10 years earlier than another person could earn several times more during one's career, all else equal (such as investing the same amount in stocks and receiving the same annual rate of return).

This graph shows such investment returns

The most common way to begin investing is to open a brokerage account, which offers traditional investments, such as stocks, bonds or ETFs. Some intermediate-level, alternative options include crowdfunding investing platforms, which offer investment opportunities in small businesses. After one becomes sufficiently skilled in investing, one could consider advanced tactics.

Duckju Kang

Duckju is the CEO of ValueChampion. He covers the financial services industry, consumer finance products, budgeting, and investing. He previously worked in the financial services industry, including at such hedge funds such as Tiger Asia and Cadian Capital.