What to tell your child who has got her first job
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You are a proud parent right now. After 20-plus years of studying and preparing, your child has started working and earning her own salary. You celebrate the day she brings home her first salary. It is a major milestone crossed for both you and her. But the lessons must continue; this time about managing money.
Here are six principles to teach her about money:
Take responsibility of your money
Become aware. Being grown-up necessarily means dealing with money. Money management means managing the cash-in and cash-out of your pocket. Tracking the debits and credits is the first step. I confess I am surprised at so many young people who work hard at their education to earn good money, but when they start working, they do not know how much tax they are paying, or where their shopping spends are going.
Study how others manage to get rich or lose money. That will serve as a guide, and can be a life-long process.
Two ways to put this into action: Download a money tracker and listen to podcasts on money matters and investing. There are plenty of apps that help track your money. Or, you could just keep a small booklet in your pocket or bag and jot down expenses. Apart from this, listen to podcasts that focus on simplifying money matters and investing to increase your understanding of these.
Whatever happens, save a portion of your salary
Saving came naturally to middle-class Indians. But somewhere in the past two decades, we have lost this. Today’s young people face an enormous social and peer pressure to keep up with the latest trends—be it clothes or eating out, taking exotic vacations or splurging on gadgets. It does not matter whether you earn Rs20,000 or Rs1 lakh; just save some of it. Saving 20% of the salary is ideal, but if not that, then at least 10% should be saved every month. This should be automatic. Learning to live within one’s salary is an art and a habit that will come in handy later in life.
Two ways to put this idea into action: One, since you may be a beginner, for starters you could start a recurring deposit (of, say, 10% of your salary every month) using online banking. Eventually, move to more efficient products such as liquid funds and systematic investment plans in equity funds.
Contribute regularly to your Employees' Provident Fund (EPF) account. If your job does not offer an EPF, open a Public Provident Fund (PPF) account and save regularly there.
Do not buy anything that is sold
The financial system—i.e., banks, brokers and agents—is set up to sell you products. They obviously want you to buy their financial products so that they make their commission or profits. What you should do is decide what you need. Financial products can be complex but with so many good articles on the Internet, one can easily read and figure out what to buy. Whichever product you need, buy it yourself. If you need advice, be willing to pay for a good adviser. This will save you a lot of money in the long run since you will not end up buying inappropriate products, and you will save on commissions.
Two ways to put this idea into action: Before giving any money to anyone, ask yourself: What incentive does this person make from this decision of mine? Find out commission levels for common financial products. Gather data and information on personal finance from publications or websites.
Beware of easy debt
The world is divided into two types of people—the ones who pay interest, and the ones who receive it. Be part of the latter set. Getting into debt is easy nowadays. Credit cards are a convenience, but if used without caution, the bill can balloon up very quickly. When one pays using a debit card or cash or an e-wallet, one is more careful of how much the item costs as the money is going from your account or pocket.
Two ways to put this idea into action: Pay your credit card bill every month on time. Even one day’s delay will cost you a lot in late fees and interest. Do not have more than one credit card or personal loan at a time. Pay off one before taking another loan.
Invest in equity
You do not need to understand or track shares in detail. The BSE Sensex, for example, comprises 30 big companies from all major industry sectors. The Indian economy is expected to grow over the next 20-30 years and so will these companies. There are index funds and exchange-traded funds that invest in the index companies. Download a graph of the Sensex over the last 30 years to see how it has grown over time.
Two ways to put this idea into action: Download the Sensex graph since 1991, when the Indian economy was liberalized. Study this graph and read about the growth of Sensex. Put some money in the market every year. Beginners can invest through index funds or ETFs.
You will love the rush of buying new things—that phone, a new futon, a big LED TV to watch movies or cricket. Of course, if you are earning well, you should enjoy your money. But there is a better way to go about it: create a lifestyle with choices such as travel, living in a particular city or working in a particular area that excites you. Eventually, money spent on lifestyle related experiences will give more pleasure than things such as an apartment, car or phone.
Lastly, more than giving you a lifestyle, remember that money is a tool to become independent. So, value your freedom over your lifestyle. Freedom means having the choice to work on projects that you are passionate about, not being chained to a bad job because you have to pay rent. It may mean freedom to take time off from work to study more, or even switch careers. So, when making money decisions, make choices that give you freedom.
Two ways to put this idea into action: List down 30 things you want to have, do and be. Make a credible plan to make these happen in future. Make a list of your values and life goals. Use this note as a guide when making money decisions.
Rajiv Jamkhedkar is founder and managing director of Serengeti Ventures Pvt. Ltd.