Let’s say X is 28 years old. He started his first job in a software company at 22. In six years, X has changed five jobs. He quit the first because of the low pay; the second because the management transferred him to Chennai, which he declined; the third because the next job offered him a high signing bonus, which helped fund his marriage; the fourth because a new baby meant higher expenses and, therefore, he needed higher income. The fifth job is where he works now.
He approached us for financial planning when he was contemplating his fifth job change. He wanted to buy a house and needed a higher income to avail a larger home loan. When we looked at his profile, we were baffled by the number of personal and professional transitions he had been through.
We realized that helping X navigate through his financial goals was not going to be easy. Cash flows were a huge problem. Managing the strain of ongoing and increasing expenses on an irregular income stream was our first challenge. X’s family income went from double to single when his wife quit her job to look after the baby. A large part of X’s income was incentive-based and sporadic. The stress of high expenses compelled him to hop jobs each year, which was detrimental to his long-term career prospects.
Our first goal as planners was to stabilise X’s life, at least from a financial perspective. We examined his income and expense patterns and helped him rationalize both areas. We restructured his salary package, and optimized it in terms of employee benefits, fixed versus variable, group benefits, reimbursements, etc. We plugged his tax gaps to increase his take-home pay.
Given that X’s family and parents were dependant on him, we recommended adequate life and health covers with separate nominees to mitigate risks of sudden money outflows. We created budgeting strategies to help X make prudent spending decisions. We helped close the outstanding balances on his credit cards and advised him to retain only one card. On this card, we helped monitor expenses and used the accumulated points to fund discretionary expenses, such as travel and entertainment. We prevented X from taking additional loans, even if it were from friends and family, and yet saved enough to build an emergency reserve, which eventually funded a professional course that helped X upskill himself and earn a huge salary raise.
It was only after two years of working with us that he finally started to save enough to start a children’s education fund for his daughter. When his wife went back to work, we began to slowly build assets towards his long-term goals.
On average, the number of life movements for a person in his 20s and 30s far exceeds those of someone in his 40s or 50s. For a middle-aged, salaried professional in the latter demographic, most of his personal or professional life runs on cruise control. For such a profile, a shift in gears may involve early retirement, funding large goals such as foreign education for their children, dealing with health issues, death or divorce. However, such changes in pace and direction rarely occur with the high frequency that is seen among millennials.
Complexities exist in both demographics, but of different kinds. Planning for an older demographic may involve greater focus on asset management and asset allocation to accomplish life goals such as children’s education or retirement. It also involves a fair amount of estate and inheritance planning. For a younger demographic, the frequent life transitions necessitate a hard look at income and cash flow management. It’s about figuring out how they can allocate limited resources to different spends, stay within their means and not go down a rabbit hole of unending debt. Though savings may be small, the number of years for those savings to grow and compound is large, and that can create exponential wealth in the future. Hence, the discipline of spending, saving and investing in a regular manner is most critical at this stage, not the size of investment.
X’s demographic is largely ignored by most financial planners. It is widely perceived that millennials do not generate high income, spend indiscriminately and hence do not save or invest much. Quite obviously this segment is not considered very lucrative to wealth managers and it makes more sense for them to set their sights on an older demographic, where the income and saving capacity is larger. I disagree. A planner’s job is not just about managing wealth, it is also about managing financial strains throughout the earning and wealth distribution years of a client. Remember that the magnificent oak tree was once a tiny acorn.
Priya Sunder is director and co-founder, PeakAlpha Investments