India’s young professionals are earning more money than ever before, but their financial future is far from secure, say financial advisers.
This is because their aspirations “are inclined towards spending and not saving,” says Narendra Kodanjji, director at Procyon Financial Planners Pvt. in Bangalore.
One recent study found that Indians are among the least financially literate people in the world, and many haven’t planned for emergencies.
That is a mistake, particularly for young professionals.
“You have time on your side and less responsibilities, which means you can make the most out of your income and plan for the future,” says Surya Bhatia, managing partner of the Delhi-based financial advisory firm Asset Managers.
Financial security is not only about spending less, but also about making the most effective use of your money. Here are some tips to help you achieve this goal:
Start early: The number one rule of accumulating wealth is to give it time.
The longer your money is invested for, the greater your returns are likely to be.
When you invest money, say in a bank deposit, and then allow the interest earned to be reinvested, you earn interest on your interest. This adds up over time.
Assume you start saving 1,000 rupees ($17.8) per month, and earn an interest of 8% per annum. After 20 years, you would have accumulated 589,000 rupees ($10,539).
In another scenario, let’s assume you save for just 15 years. Even if you invest a higher amount, say 1,500 rupees per month, at 8% interest, you’ll have accumulated just 529,000 rupees. That’s 60,000 rupees less because you lost out on the benefit of saving for five years.
Pay yourself first: Think of saving as a way to reward yourself. After all, you can use these savings to make big-ticket purchases like a car or a house, and ultimately, to fund your retirement when you are done working.
So, every month when your salary comes in, pay yourself first.
“Commit to an amount you can save every month and then pay your expenses,” says Ranjit Dani, a financial planner with Nagpur-based Think Consultants.
If you earn 30,000 rupees per month, set up an automatic transfer of say 6,000 rupees per month into another bank account which you won’t touch. Use only the remaining 24,000 rupees for your spending. So long as you save your stipulated sum, you can still buy that new phone or laptop!
Often, young people delay saving, saying that they don’t earn enough. But even setting aside small amounts can help.
Create an emergency fund: One of your first financial steps should be to create an emergency fund. This can be used if you lose a job, or are disabled or incur any other large expense that may not be covered by insurance.
A general rule of the thumb is to set aside enough cash to cover six months of living expenses. But you may have to save more or less, depending on other factors like income from other family members, and the number of people who depend on your salary.
Advisers recommend buying a basic life insurance, that will be useful for your family members should anything happen to you. Also, consider getting a family medical insurance plan.
If you have a high-interest loan outstanding, is possible, pay that off first. “Your income resources are (limited), so prioritizing will help,” says Mr. Dani
Investing wisely: A typical refrain from young professionals is that they don’t know where to invest their savings. “But everyone knows how to start a recurring deposit in a bank,” says Mr. Bhatia.
Another good option is to invest in a short-term debt mutual fund. These funds buy debt securities issued either by the government or high-quality companies. The benefit of buying a debt fund versus a bank deposit is that gains on a fund are taxed typically at a lower rate than bank interest.
With time, you can also dip your toes into stocks, via a stock mutual fund that invests in large companies. Consider the HDFC Index Sensex Plus, which invests primarily in the 30 stocks listed on the benchmark Sensex, or the Franklin India Bluechip fund, which buys stocks of large companies like ICICI Bank Ltd. and Infosys Ltd.
Stocks typically provide higher returns over the long term, and help investors stay ahead of India’s high inflation. But in the short term, the price of stocks and stock funds can change a lot – so be warned.
Advisers suggest setting up a systematic investment plan in which a small amount is invested in the funds of your choice every month.
You can use websites like Value Research and Morningstar to read more about specific mutual funds.
Young professionals can allocate a part of their savings in bank deposits and debt funds, and as much as half of their savings in equity funds, for a period of five to 10 years. “You have to understand your risk capacity as well as your risk appetite,” Mr. Bhatia adds.
Say no to credit: It’s easy and tempting to use credit cards to eat out, go on holidays and for shopping, especially now that shopping online is just a click away.
But financial advisers say individuals should avoid using Credit cards as much as possible. This is mainly because if you fall behind a card payment, you may have to pay an interest rate of as high as 30%. Remember: your typical bank fixed deposit pays an interest of less than 9%.
For instance, credit cards give an option of “flexi pay” which basically allows you to make a big purchase and then pay it back in small monthly installments. But this also carries a high interest rates.Also, when people use a credit card, they tend to spend more than they would if they were paying in cash.
“The bottom line, is if you don’t have money, don’t spend it,” says Mr. Dani.
If you have credit card debt, pay it off as soon as possible, even if you have to take a personal loan for it. “Personal loan comes at half the price of credit card loans,” says Mr. Bhatia
Edited By Cen Fox Post Team
