Opinion | 5 money rules millennials should follow3 min read . Updated: 11 Feb 2019, 08:35 AM IST
- Give money time to grow. One can’t (and shouldn’t) wait for the perfect time to invest
- Invest only after setting up emergency fund
Millennials are the unconventional lot, who believe in following their passions. They believe in experiences and generally end up spending a lot on their travel, hobbies, etc. They are aspirational, with 24x7 internet connectivity, live on credit cards, and wear best of international brands. Savings and investments are not on their priority list. Their financial planning behaviour is also very different from older generations. They prefer to save for short-term smaller goals, like a trip to their next overseas destination or buying the latest Apple MacBook. Savings for purchasing a house or for retirement planning are among the last on their lists. But they would do well to follow some age-old rules.
Spend less than you make: Take a detailed look at your expenses and honestly ask yourself which of these can be cut down without making too many changes to your lifestyle. An expense tracker app will go a long way in helping you identify your spending patterns and eventually correct them. Set goals on your expenses and save more without actually making more money.
Follow the 50-30-20 rule of thumb. Spend 50% on necessities (rent, food, transport, education), another 30% on things you want or enjoy (discretionary expenses) and save the remaining 20%.
Start investing early: The sooner you start, the earlier you’ll reach your savings goals. Give your money time to grow, and you will reach your goals faster. One can’t (and shouldn’t) wait for the perfect time to invest. The power of compounding makes an amount that seems small now, become big over time.
For instance, a 25-year-old investing ₹5,000 per month until retirement at 65 years would be investing a total of ₹21 lakh and with a 8% annual growth rate, will have a retirement corpus of ₹1.08 crore, gaining ₹87 lakh. On the other hand, a person who starts investing ₹5,000 per month at the age of 35 years, would be investing ₹15 lakh in total till age 65, and at an annual growth rate of 8%, the retirement corpus would be ₹46 lakh, gaining ₹31 lakh. You invested ₹6 lakh less, but your retirement corpus was less than half, all because you started 10 years later. Therefore, one should begin his/her investment journey at the earliest.
It is okay to start small. You can always rack it up, as time passes by. It is also advisable to do this regularly.
Have an emergency fund: You must have at least four months’ worth of living expenses stowed away in an accessible bank account or liquid/instant redemption funds. This is your emergency fund available for withdrawal immediately. Be mindful that you use it only in times of real emergencies, like medical or loss of a job.
Invest only after setting up this emergency fund.
Settle your debts: Do you know what happens when you borrow money to buy something, you spend today with tomorrow’s income (at a high cost). Sadly, the high interest rates on your credit card just can’t be made up by your investments. Borrowing at such high rates leaves you much poorer. Settle your debts first. If you have low-interest-rate loans, consider investing in a debt fund where the interest you earn exceeds the interest you pay. That’s smart money in your pocket.
Set goals and save for them: Set short- and mid-term goals, like your next exotic holiday, and save for that. The advantage of this practice is that it makes one a more disciplined investor.
An important milestone for you should be your retirement. The key to a successful retirement is to start early. The earlier you start saving, the more you’ll have when you retire. Every ₹1,000 you don’t save could be about ₹15,000 less for your retirement fund, at a conservative 8% growth in 35 years. So, if you’ve dreamt of buying a round-the-world ticket on your 70th birthday, start now.
To sum it up, millennials need to prepare for the coming decades that may include global economic uncertainty. One needs to start early and continue investing a considerable part of earning regularly. It is always advisable to seek help from financial advisors and planners.
Kunal Bajaj, is head, wealth management, MobiKwik