In today’s fast-paced world managing personal finances has never been more crucial. For undergraduates and young adults in their early 20s, financial literacy is not just a skill but a necessity. This guide is tailored to help you navigate the often-confusing world of money management, providing practical steps and vivid examples to make financial concepts easy to understand and apply.
Setting Financial Goals
Setting financial goals are the foundation of any successful money management plan. It provides direction and purpose, ensuring that your financial decisions align with your long-term objectives.
Start by identifying your priorities and categorizing them into short-term, medium-term and long-term goals.
Short-term goals, such as saving for a new smartphone, a trip with friends or a concert ticket, usually have a timeline of less than a year.
Medium-term goals might include saving for a down payment on a car, establishing an emergency fund or financing further education, generally ranging from one to five years.
Long-term goals involve planning for the future, like buying a house, starting your own business or aiming for early retirement and typically extend beyond five years.
To effectively achieve your objectives, make your goals smart. Start by defining your goal clearly for example, instead of just wanting to save money. Specify “I want to save Rs.3000 in six months.” Ensure that you can measure your progress by setting milestones, such as saving Rs.500 per month. Your goals should be achievable and realistic, so if your budget is tight focus on saving Rs.500 a month rather than aiming too high. Make sure your goal is relevant and aligns with your larger plans, such as saving money to study abroad. Finally, make it time bound to create a sense of urgency, like “I will save Rs.3000 by December.”
Consider Piyavi, a 21-year-old student. She sets a short-term goal to save Rs.60,000 in six months for a laptop (Not a brand new one). She plans to save Rs.10,000 monthly from her part-time job. By tracking her progress, Piyavi stays motivated and reaches her goal on time.
Budgeting Basics
A budget is your financial roadmap. It helps you understand where your money goes and ensures you spend within your means.
To get a better idea of your budget, first you should track your income. Include all sources of income such as part-time jobs, scholarships or parental allowances in your income. Then prepare a list of your expenses. There are two types of expenses;
- Fixed Expenses- which are fixed
Examples: Rent, tuition fees and monthly subscriptions
- Variable Expenses- which vary over time
Examples: Groceries, utilities and entertainment
As the next step you can categorize your expenses like housing, food, transportation, entertainment and savings. Based on your income, allocate specific amounts to each category. Ensure your total expenses do not exceed your income. Regularly check your budget and adjust as necessary. If you overspend in one category cut back in another.
Let’s hear Nuwan’s story. Nuwan, a 22-year-old engineering student, uses a simple spreadsheet to track his monthly expenses. By categorizing his spending, he realizes he spends too much on eating out. Nuwan decides to cook more meals at home, saving an extra Rs.5,000 each month which he redirects towards his savings goal.
Saving Smartly
Saving money provides financial security and peace of mind. It prepares you for emergencies and helps achieve your financial goals.
You should treat savings as a mandatory expense. Set aside a portion of your income as soon as you receive it. It’s better to choose an account with a good interest rate and minimal fees to deposit that selected portion. Additionally, you can set up automatic transfers to your savings account to ensure consistency. Identifying non-essential spending and reducing it is a crucial point on this topic. This could mean skipping that daily coffee or limiting online shopping.
This is how Asla did that. Asla, a 20-year-old arts student, sets up an automatic transfer of Rs.1,000 from her monthly stipend to her savings account. By the end of the year, she has saved Rs.12,000 without feeling the pinch, all thanks to automation and disciplined spending.
Managing Debt
Debt can be a useful financial tool if managed wisely. However, uncontrolled debt can lead to financial stress.
First, list all your debts including the amount owed, interest rates and repayment terms. Then focus on paying off high-interest debt at a specific amount each month towards debt repayment. Aim to pay more than the minimum amount due. Most importantly, unless absolutely necessary avoid accumulating more debt. Living within your means is best for your own being.
This is Danush’s story. Danush, a 24-year-old recent graduate, has a student loan and credit card debt. He lists his debts and realizes his credit card has a higher interest rate. Danush decides to pay extra on his credit card while making minimum payments on his student loan. By doing so, he reduces his interest burden and pays off his debt faster.
Investing for the Future
Investing helps grow your wealth over time. It can provide higher returns compared to regular savings accounts, helping you reach your financial goals faster.
To embark on your investment journey, start by educating yourself on the basics of investing which includes understanding different asset classes such as stocks, bonds and mutual funds. It’s wise to start small to familiarize yourself with the process; consider using robo-advisors or mutual funds if you’re a beginner. Diversifying your portfolio is crucial to mitigate risks, so spread your investments across various asset classes. Additionally, adopting a systematic investment plan (SIP) allows you to invest a fixed amount regularly, helping to average out market fluctuations over time.
Meera, a 25-year-old working professional, decides to invest Rs.5,000 monthly in a diversified mutual fund. By consistently investing and benefiting from compounding, Meera sees her wealth grow significantly over the years, bringing her closer to her financial goals.
Building Credit
A good credit score can help you secure loans at favourable interest rates and rent apartments more easily.
Managing credit wisely is crucial for undergraduates who rely on allowances. Responsible credit card uses, like paying off the full balance each month, helps avoid costly interest charges. Timely bill payments are essential since late payments can harm your credit score. It’s also important to regularly monitor your credit report for errors and report any inaccuracies immediately. Lastly, keep your credit utilization below 30% of your available limit to maintain a healthy credit score.
Here this is Suresh’s story. Suresh, a 22-year-old student, applies for a student credit card. He uses it for small purchases and pays off the balance in full every month. By doing, so Suresh builds a positive credit history, making it easier for him to secure a car loan after graduation.
Planning for Emergencies (Emergency Fund)
An emergency fund provides a financial cushion in case of unexpected expenses, such as medical emergencies or job loss.
To build a solid financial safety net, undergraduates should aim to save enough to cover three to six months’ worth of living expenses. Start with a manageable amount, like Rs.500 a month, which can accumulate significantly over time. Keep these savings in a high-interest account for easy access when needed. If you ever use your emergency fund, make it a priority to replenish it promptly to ensure ongoing financial security.
Sara, a 24-year-old final year undergraduate student, starts by saving Rs.1,000 monthly into her emergency fund. After a year, she has a Rs.12,000 buffer for unforeseen expenses, providing her with peace of mind and financial stability.
Making Money as a Student: A Practical Guide
Higher education in South Asia can be financially challenging, but students have various ways to earn money. Teaching tuition classes is a popular option, offering income and skill enhancement. Freelancing platforms like Upwork and Fiverr allow students to offer services like writing and graphic design. Artistic students can sell their crafts on Etsy or social media. Part-time jobs in restaurants and retail provide steady income, while internships offer paid professional experience. Content creation on blogs or YouTube can generate revenue through ads and sponsorships. Event management and online surveys also offer flexible earning opportunities, helping students balance academics and finances.
Your Financial Journey Begins Now
Mastering personal finances is a journey that starts with understanding and applying the basics. By setting clear goals, budgeting effectively, saving smartly, managing debt, investing wisely, building credit and planning for emergencies, you lay a solid foundation for a secure financial future. Remember the key to financial success is consistency and discipline. Start today, your future self will thank you.
References
Dave Ramsey (2013). The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness. Nashville: Thomas Nelson
Khan, A. (2019). “Maximizing Earnings Through Art: A South Asian Perspective.” Journal of Fine Arts, 8(2), pp. 123-134
Kiyosaki, R.T., (2000) Rich Dad Poor Dad: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not! New York City: Warner Books
Ramit Sethi (2009). I Will Teach You to Be Rich. New York: Workman Publishing.
Sharma, L. (2018). “Part-Time Jobs for Students: Benefits and Challenges.” South Asian Journal of Employment Studies, 10(4), pp. 201-215
Suze Orman (2005). The Money Book for the Young, Fabulous & Broke. New York: Riverhead Books
Article by: K.G. Chamodi Navodya (1st year)