BackMoney Management: What millennials, Gen Z can learn from parents
When it comes to money, there is always something to learn from your parents - something that they did right, some learnings from their mistakes, and a few of their money habits that can be tweaked
PremiumWhen it comes to money, even though their heart is in the right place, advice coming from our parents might be obsolete. “Our job profile, benefits attached to them, pay structure, and even rate of interest that the banks offer are different from our parent’s time," says Deepak Krishnan, financial planner at Mangrove Wealth. Hence, the way we should handle our finances cannot be the same.
Still there is always something to learn from them - something that they did right, some learnings from their mistakes, and a few of their money habits that can be tweaked.
Learning from what they did right:
Saving with consistency
Some plain vanilla advice never goes wrong. For example, the age-old theory ‘save little, but save consistently’ worked like magic for generations before us in terms of wealth creation. “And, it is not that youngsters today do not want to save, in fact, in many cases they put in more money compared to their parents but what they lack is consistency," says Shweta Jain, certified financial planner, founder, Investography, and author, My Conversations with Money
Explaining the pattern, Jain says further, it is really encouraging to see many youngsters participating in the markets actively. But most of it is not handheld. “They look at the market returns for the past two years, and jump in. Then the moment the market rally stops, they sell in panic making huge losses." This inconsistency is extremely harmful for one’s finances, she adds.
“Savings save you. Try to save 20% to 30% of your income. If you can’t (considering income versus necessary expenses), save small, but save consistently like your parents did, Jain further says.
Money habits that can be tweaked:
Pattern of investment - then and now.
The common notion is people from our parent’s generation are risk averse. “This is not exactly true," says Krishnan adding, “in the 70s and 80s, the interest rates from fixed income instruments were much higher. So simply by putting money into them, they would earn double digit fixed returns." says Krishnan.
So, basically, there was no need to look for different avenues for higher growth, unless someone really wanted to. On the other hand, today, money needs to be carefully invested just to be able to beat inflation.
Moreover, with too many choices in hand, we have to ensure that the products we choose align with our investment goals, tenure and risk appetite. For example, as much as it is an absolute essential to invest in equities, it is equally important to recognise that equity-linked investments are exclusively meant for long-term investments. So, instead of making investments randomly, “one should consult a financial advisor so that they can suggest investments as per his/her goal," says Krishnan.
Also, it is equally important to diversify your assets, asserts Jain adding, “Concentration can be a big risk too. Investing/betting big on a stock or a couple of stocks could mean that you lose your entire investment. It could set you back a few years."
Changing rules of making a budget
Growing up, most of us have seen our parents bargaining for groceries, counting the number of restaurant dinners, and even being strict with the number of phone calls. All this was part of maintaining a decent living within a budget. “Today, many families have moved from a single income structure to a double income structure. Many are earring from multiple sources, so the same budgeting formula doesn't work any more," says Krishnan.
However, “It is important to keep a tab on where the money is going."
“If one looks at their spending habits for the past 5 to 6 months, he/she will understand where the discretionary money goes and where the non-discretionary money goes. If the non-discretionary money is substantial, then one can sit across and talk," he adds.
This is how budgeting works today.
Learning ‘When’ to say no to Credit cards:
In the 80s or 90s, most middle class households used to be a one-vehicle home, maybe much later in life, our parents would think of buying a second car. On the contrary, today, when a youngster is employed just after finishing college, the first thing they think of is buying a bike or car. “This is how consumerism has changed and we have to accept this with an open mind," says Krishnan.
The problem lies elsewhere. With tools like credit cards and personal loans, we presume that our purchasing power is higher than our parents. In reality, when you are resorting to EMI too much, your monthly expenses shoot up significantly. Also, considering the interest amount, you are paying extra for every product that you are buying on credit.
“Nobody expects you to live like a monk, but a line has to be drawn somewhere, otherwise it will lead to a credit trap. How much is enough is critical to know," says Krishnan.
Learning from their mistakes
Mixing investment and insurance
Investments and insurance have two different purposes. Investments help in wealth generation, while insurance covers financial risk. Not understanding this concept carefully, many from the earlier generation ‘invested in life insurance policies’ assuming that it serves both the purpose. “In reality it completely jeopardises finances . Paying hefty premiums and hence not earning enough on the savings was a big mistake. A simple math explains why," says Jain.
The coverage amount for a life insurance policy with maturity benefit is usually 10 times its yearly premium. At the same time, they provide a return of 3% to 4%. Now, if you buy a ₹25 lakh insurance policy for 20 years, the annual premium amounts to ₹25,000, and for that the returns would be around ₹7 lakh.
On the other hand, yearly premium for a ₹25 lakh term plan is roughly ₹5,000.
Now, if you would buy a term plan instead of a policy with maturity benefit and decide to save the rest (suppose 8% interest rate), then after 20 years, its value would be ₹9.15 lakh.
Younger people today understand this and they are aware of term plans and how it works. But, Krishnan says, “The mistake they make is while deciding on the coverage amount. Don't go ballistic and buy a term plan worth a crore. You should buy a plan as per your need."
Money should be managed on the basis of one’s earnings, goals and risk appetite. There is no perfect model to follow. So learn carefully from other’s success and mistakes, including your parents, but build a model that meets your own goal.
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