The spending and saving behaviour differs from person to person – some take the financial independence for granted and overspend to enjoy life, while some become more responsible and start saving and investing early.
As people start earning, they become financially independent to spend and save. However, the spending and saving behaviour differs from person to person – some take the financial independence for granted and overspend to enjoy life, while some become more responsible and start saving and investing early.
But one should develop the habit of saving – be it small or large – and invest the money saved in a planned way as early as possible.
Here are five tips for Millennials to consider before investing for the first time.
1. Plan before you start
Before you start investing, you should know why you are going to do so. Clarity in purpose will help you decide how much to invest and where to invest. It will be better if you take the guidance from a financial advisor to lay out a road map for your investment journey before you start.
“The fundamental aim of any investment is to deploy the present money with the expectation of earning more reward in the future. To make an investment of any sort it requires a holistic approach with a decent set of strategy which underlines a long-term objective of investment. One should be mindful of these fundamental aspect of investment which includes understanding a basic difference between various asset classs, particularly equity and debt instruments,” said Dinesh Rohira, Founder & CEO at 5nance.com.
Stressing that there are no shortcuts in making money, Rohira further said, “It is imperative to do thorough research with a considerable amount of patients. It will be sensible to invest in the instruments that are easy to understand with a sustainable growth. The investments should be attached with a defined objective and there has to be a strategy or a trigger for the exit from the investments. Remember you can enjoy the profits only when you exit from your investment.”
2. Start early
If you start the investment process early, you may maximise the benefit of compounding and accumulate considerable wealth through small savings.
“Everyone has come across the formula of compounding, but very few people really understand its power. This is the reason people don’t start saving early and hence lose out on the power of compounding. Albert Einstein said that power of compounding is the eighth wonder of the world. Investing money early ensures your money works hard for you,” said Raghvendra Nath, MD at Ladderup Wealth Management.
“It is not necessarily important to have bigger savings or investable amount to plan for financial related goals. Rather an underlying factor which millennial should consider at this age is starting early with their investment even if it accounts for 5-10 per cent of overall income. This is because over a period of time even this small savings if diverted to investment can earn fortune through a compounding effect,” said Roharia.
However, stressing that present is as important as future, Nath said, “People should have a balance between current earnings, earning potential and savings. While at the early stage of career, one might not have a higher salary. However, at this stage of the career, one should not think about his longer term goals of having a retirement corpus and save all his money to meet such goals. While saving and investment is important, people should also enjoy their life and spend for all the required expenses. As one would progress in one’s career, future earnings would compensate for the retirement corpus.”
3. Take calculated risks
Nothing can be achieved without taking any risk – how small or big it may be. It is said that the biggest risk is taking no risk. So, to achieve your financial goals, don’t get afraid of taking some calculated risks, but not undue risks.
“Managing risks is more important than not taking any risks. Most of the investments come with some amount of risks. Investments in low risk assets would always give you lower returns. The classic example is your bank fixed deposits. People may find bank fixed deposits very safe and easy to invest, however, historically it has given negative real returns (Net returns less inflation). So, in the long term this money may just lose its value as time passes. So it is not prudent to stay completely risk averse and one should look to manage risk,” said Nath.
4. Avoid falling into debt-trap
Millennials are fond of quick success and don’t hesitate buying things on EMIs without waiting for accumulating money to purchase expensive things. While EMIs make costly luxury items look within reach, but buying things which are not necessary may lead you to a debt-trap.
“Temptation of borrowing money is there to service the obligation which comes with high interest rate. Also there is a case of excessive usage of credit card even on small basic consumption. However, this is exactly that millennial should avoid falling which usually have an opportunity cost to forgo. For instance, buying a gadget worth Rs 80,000 through credit card cost EMI (5 years) of Rs 2000 approximately, which also depreciates over period of time. But if you invest same EMI via SIP in some equity scheme, then it will fetch you approximately 49 per cent profit over an investment of Rs 1.20 lakh. Remember that a small outstanding credit card bill rolls up every month and piles up to a huge amount,” said Rohira.
“Be regular to pay credit cards bills and loans should be taken considering that EMIs should not be more than 40 per cent of total income. More importantly millennial should have emergency corpus equivalent to six-month of income,” he added.
5. Don’t mix short-term and long-term investments
To achieve smaller and immediate financial goals or to create emergency corpus, investments in short-term funds or instruments are needed, while to meet large and far-away goals, you need to make long-term investments to beat inflation. So, mixing investments may cause you miss both the goals.
“As people grow older in their career and as their salary increases, there is another factor which comes into picture is the lifestyle inflation. While at an early stage of the career, one might have a goal of buying a two wheeler. As he grows further in the career that goal changes to having a car and further to a luxury car. So as people grow older and succeed in their career, lifestyle inflation is a vital factor to consider for all the future expenses. Such goals are typically achieved only with investments in assets which require long term investment horizon where the value of investments grows multiple times as the time progresses,” said Nath.