You’ve just started earning, moved into your own place, and are finally getting a taste of financial independence. The first paycheck has hit your account, and the world feels full of possibilities. But alongside that rush, its also important to keep in mind of ways to manage this money wisely. Should you start investing right away, or is buying insurance the smarter first step?
It's a classic dilemma, and the right choice depends on where you stand financially, your responsibilities, and, most importantly, your risk appetite. Let’s break it down so that by the end of this, you’ll have a clearer idea of what makes sense for you.
The role of insurance
Insurance, in simple terms, protects you from unexpected financial blows, like medical emergencies, accidents, or even the unfortunate loss of life. While you might feel invincible in your 20s, life has a way of throwing surprises, and not all of them are pleasant. There are two key types of insurance that you should consider early on:
Health Insurance: Even if your employer provides one, it might not be enough. Medical costs in India are rising rapidly, and a sudden hospital visit could wipe out your savings. A personal health insurance plan will ensure that an illness doesn’t derail your finances.
Term Life Insurance: If you have dependents, parents, younger siblings, or even a partner, it makes sense to get a term life insurance policy early. The premiums are lower when you’re young and healthy, and it ensures your loved ones aren’t left struggling financially if something happens to you.
Why investing early matters
Your 20s are the best time to start investing because you have time on your side. Thanks to compounding, even small amounts invested now can grow significantly over the years. For example, if you invest ₹5,000 per month in a mutual fund that offers an average return of 12% per year, in 20 years, you could have around ₹50 lakh. The earlier you start, the more wealth you accumulate with relatively less effort.
Smart investment options include Mutual Funds (SIP), PPF, Stocks, FDs & Debt Funds. SIPs in equity mutual funds allow you to invest small amounts regularly and benefit from long-term market growth, while PPF offers a safe, long-term investment with tax benefits. Stocks can be lucrative if you're willing to take risks, whereas fixed deposits and debt funds provide stability.
So, what should you do first?
A balanced approach works best. Start by getting basic health insurance (even a ₹5-10 lakh plan provides crucial coverage) and building an emergency fund with at least 3-6 months’ worth of expenses. Once that’s done, begin investing. Even a small SIP in an equity mutual fund can make a big difference over time. If you have financial dependents, getting a term life insurance plan early is a smart move.
Also, you don’t necessarily have to choose between insurance and investing. A structured approach where you allocate a portion of your income to both can set you up for a secure future while still allowing you to grow your wealth. For example, say you earn ₹50,000 per month. Here’s how you might distribute it:
₹5,000 for a health insurance premium
₹10,000 towards a SIP in a mutual fund
₹5,000 towards an emergency fund (until you build a sufficient cushion)
The rest for rent, expenses, and lifestyle needs
The mistakes to avoid
1. Delaying Insurance & Investments: Buying early means lower premiums and better coverage, and starting investments early allows compounding to work its magic.
2. Not Having an Emergency Fund: Life is unpredictable, and having a financial cushion prevents you from dipping into your investments when unexpected expenses arise.
3. Buying the Wrong Insurance: Choose term insurance over traditional life insurance plans, and ensure your health plan covers hospitalization adequately.
Financial planning in your 20s is about balance. While insurance ensures that life’s uncertainties don’t knock you off track, investing ensures you’re actively building wealth for the future. The key is to start early and make informed decisions.
Think of insurance as the seatbelt and airbag in your financial car—it won’t make you rich, but it’ll keep you safe. Investing, on the other hand, is the fuel that will drive you to your financial goals. You need both to move forward confidently. Instead of choosing between the two, why not do both? Your future self will thank you for it.