Enjoy your financial freedom. Do Spend. But save something for the rainy day as well
Karishma Gupta, 23, is currently pursuing her graduation in architecture and residing in Pune. She will complete her studies in mid-March 2020 and start her professional career from April. She is set to join a private firm.
Her current discretionary and lifestyle expenses are Rs 10,000-15,000 a month, and her parents gave her this amount through her period of study.
But now, Karishma feels anxious as she is all set to join her first job soon and would be forced to take financial responsibility, independently. There would be no monthly allowance from her parents and she needs to manage her monthly expenses, start repaying equated monthly instalments (EMIs) for her education loan of Rs 4 lakh and save for her post-graduation program’s fees.
This scenario is common among several millennials in India when they join their first jobs. Says Karishma, “To manage my finances in a better way, I have started seeking knowledge by reading newspapers, periodicals, personal finance blogs, watching news, etc. regularly for the last one year.” She is learning budgeting skills from her parents and is attending financial planning workshops on holidays/weekends to understand the various assets to invest in, the importance of insurance, tax-planning, etc.
Shyam Sunder, Managing Director of PeakAlpha Investment Services Pvt Limited points out, “It’s been observed that, in the early 20s, investors can plan their finances better with the right knowledge and financial skills as they don’t have a spouse or a child to look after. They should invest at least 50-60 per cent of their monthly income after starting on a job.” The balance amount can be utilised for monthly expenses, EMIs, credit card dues, etc.
Here are some financial planning tips for you to get started.
Contingency fund and investment planning
Prashant Gaitonde (25) resides in Bengaluru and works as a software developer. While starting off in July 2017, he was in a dilemma on where to invest, time-frame etc. He didn’t know much about building a contingency fund, which is the first step towards saving and investing. During the initial months after he started working, he used his savings for discretionary expenses. In other words, he spent on items that weren’t very essential. Since he lacked the knowledge of other financial assets, he followed his parents’ advice of investing only in fixed deposits. He managed to save around Rs 4 lakh in the initial 15 months of working and this was invested only in bank fixed deposits.
In November 2018, he attended a financial planning workshop organised by his organisation. He learnt that contingency fund is an amount of money set aside specifically for emergencies – temporary job loss, any uninsured medical conditions, etc. As a software developer, Prashant is quite familiar with frequent job losses that have plagued the sector for years. So, as a thumb rule, he has now kept aside three months’ worth of basic living-expenses from the Rs 4 lakh parked in fixed deposits. He has built a contingency fund by investing in liquid and ultra-short term mutual fund schemes.
Saurav Basu, Head of Wealth Management, Tata Capital Financial Services says, “Millennials should use the thumb rule – 50:20:30 – wherein 50 per cent of the income should go towards living expenses and spending (including food, travel, etc.); 20 per cent towards savings for your short-term goals or for liquidity purpose; and 30 per cent towards long-term goals (like planning for children education, marriage, retirement; basically wealth creation).”
Upon engaging a financial planner, Prashant realised the importance of diversification and equities in achieving his long-term goals. He moved excess amounts from fixed deposits to invest in large-cap funds. Then, after understanding how mutual fund schemes work, he started monthly investments in mid and multi-cap schemes. Sunder advices, “Millennial investors should commence investing in large-cap or index funds and then diversify to multi-cap or mid-cap funds as per their risk appetite.”
Often, millennials feel that retirement is too far away and avoid investing for this goal. However, since age is on their side, the amount they would need to save each month for retirement would be relatively quite low.
Don’t depend on employer’s insurance
Companies these days tend to provide insurance cover to employees. Policies include those relating to health, personal accident and life insurance benefits. However, the insurance cover varies for employees based on their rank/grade in the company. Also, for several employees, the insurance cover offered by the company may be inadequate.
For instance, Prashant’s employer had offered him a health insurance cover of Rs 4 lakh. Considering, today’s medical inflation, this amount is low for him or his parents. So, after taking some advice from his financial advisor, he purchased a family floater policy of Rs 10 lakh.
Radhika Shah, CEO and Director of Aarvi insurance brokers says, “Millennials switch jobs multiple times in their 20s and 30s, and so depending on insurance policies of employers is not the best option.” Basically, when you leave the current organisation, the insurance benefits are not transferred to the new employer.
Also, the new employer may not offer insurance benefits, and so you may have to purchase an insurance policy outside. If your health condition worsens, then insurance company may charge a higher premium when you buy a policy privately. Shah advices, “Purchase health insurance policies when you are young and less likely to have a medical history with serious health conditions. Also, the cost of premium will be lower when you are young.”
Repay education loans
An educational loan is a hefty burden for most millennials. Repaying an educational loan takes away most of the savings. You must consider cutting down your expenses, and the saving could be invested.
Also, you need to consider whether to repay the education loan early or to continue for the full tenure. Under Section 80E of the Income Tax Act, the entire interest you pay on education loan qualifies for deduction. This income tax deduction can be claimed for up to eight years.
But it’s always advisable to repay the loan at the earliest. Besides, as Sunder adds, “Suppose, your annual income is low (i.e., in the tax exempted bracket), you will have to bear the full burden of the education loan. You won’t get any tax benefits.” For such people, it’s better to repay the education loan at the earliest.
Avoid splurging and going overboard on loans
According to a study by MoneyTap, an app-based credit line, the top three reasons for which millennials borrowed in 2019 were to pay bills (25.09 per cent), meet medical expenses (21.25 per cent) and spend on weddings (14 per cent). For millennials, using credit cards can be risky, as they cannot refrain themselves from splurging their salaries. The easy availability of credit, along with exciting reward points, cashback offers and discounts is enticing for millennials.
Thus many end up spending a lot more than what they could repay. To avoid such a situation, Prashant didn’t apply for any credit card in the initial 15 months after he started working. Sahil Arora, Director and Group Business Head of Investments and Insurance at Paisabazaar.com says, “The best to way to avoid overspending is to keep track of unbilled balances on your credit card and spend only what can be repaid by the bill’s due date.”
Also, payday loans are becoming popular among millennials. These are ultra-short term, unsecured and high-interest personal loans of small ticket sizes that fill the temporary gap in cash flows. The loan amount ranges between Rs 500 and a few lakh rupees. The interest rate is one per cent per day which translates to 365 per cent annually. Many millennials are using them for regular purchases and discretionary spends. Dev Ashish, founder of StableInvestor.com says, “If millennial borrowers aren’t careful, this line of high-cost credit can easily push them into a debt trap. Such loans should be avoided for discretionary spends.”
Final-year college graduates are now a few months way from stepping into the job market. At the other end, millennials, especially those who are in the first few years of employment, are most likely taking their life’s first steps into the world of money management.Have a basic financial plan in place. Remember; a stitch in time saves nine. Enjoy your financial freedom. Do Spend. But save something for the rainy day as well.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.