Falling in the age brackets of 20-35 years, most working millennials either find themselves on the verge of starting their career path or consolidating their already chosen one. Many are also additionally burdened with EMI repayments and/or bear the financial responsibility of taking care of their aging parents, child’s education, etc. As financial decisions taken during this life stage can influence their financial health for a long time to come, I will discuss some smart financial moves for ensuring the financial fitness of working millennials:
Create an adequate emergency fund
Before beginning to invest towards any of your life goals, ensure you have an adequate emergency fund in place. Doing so would help you in tackling unforeseen financial exigencies like a sudden job loss or loss of income due to accident and severe illness. The size of this fund should be at least 6 times of your monthly mandatory expenses. Since emergency fund would be required instantly, it should be parked in instruments having high liquidity and capital-protection features, such as high-yield savings account, short term or ultra short-term debt funds. Remember to increase the size of your emergency fund in accordance with the rise in your monthly mandatory expenses.
Create a financial plan
Financial planning is the first step towards achieving your financial goals. This will help in creating comprehensive money management strategy based on your life goals, cash flows and potential risk. This helps in providing a proper direction to your investments and ensuring appropriate resource allocation for achieving your life goals. Start by finding out the amount required for meeting each of your financial goals, the time horizon left to achieve them and the inflation rate. Once you know the size of your financial goals, take the help of SIP calculators to find out the monthly contributions required for achieving the financial corpus.
Consider appropriate asset allocation strategy
Asset allocation is the process of diversifying your investments across various asset classes like debt, gold, equities, fixed income securities, etc, according to your risk appetite and investment horizon of your financial goals. For example, as equities can be very volatile in the short and medium term, an investor with a moderate or low-risk appetite should stick to high-yield fixed deposits or short-term debt funds for goals maturing within 3 years as these instruments offer high degree of capital protection. Those with higher risk appetite can consider hybrid funds for their short and medium-term goals. Similarly, investment for long-term goals like retirement planning, child’s education/ marriage should be invested in equity mutual fund as equities outperform other asset classes and inflation over the long run by a wide margin.
Start investing early
The sooner you begin, the faster you reach your investment goal. Starting investments early also helps in instilling financial discipline and helps you benefit from the power of compounding. With the power of compounding, the gains generated from your investment start generating returns themselves, thereby earning exponentially higher returns over the long term. This is especially helpful in achieving large-ticket financial goals like generating corpuses for your post-retirement life and children’s higher education. For example, a 24-year-old would require a monthly SIP investment of Rs 1,400 at an assumed annualised return of 12% to build a corpus of Rs 1 crore by the time he turns 60. For a 38-year-old, building the same corpus at the same rate of return over the next 22 years would require a monthly SIP investment of Rs 7,800.
Avail credit card to build your credit score
A good credit score has become an important financial asset today. Lenders not only consider credit score while approving loan and credit card applications, they are also increasingly offering lower interest rates to those having higher credit scores. As there can be no credit score without a credit history, those lacking credit history can steadily build their credit score using credit cards for their daily expenses and ensure timely bill payment. Credit card transactions are reported to credit bureaus, which are then used to calculate your credit score. Those denied credit cards due to their inability to qualify various eligibility criteria can opt for secured credit cards to build their credit history.
Buy adequate insurance cover
Generally, most confuse insurance with investment products. As a result, many end up investing in ULIPs, money back plans, endowment policies etc, which come with very little life cover and generate sub-optimal returns. Ideally, your insurance cover should amount to at least 15 times of your annual income and the best way to buy such a large cover is to opt for term insurance plans. Additionally, buy personal accident and health policies to protect yourself from the loss of income arising out of disability and high medical costs respectively.
Consolidate your debt
Increased access to retail credit and the haste to make lifestyle decisions is leading many to avail multiple loans at higher interest rates. This often leaves many with very little for long-term investment. The best way to save on high interest cost debt is to consolidate your existing multiple loans into a single one at a lower rate and for a longer tenure, if required. Top-up home loans would be the best debt consolidation option for the existing home loan borrowers having multiple loans. Others can consider loan against securities, personal loan balance transfer and loan against property according to their loan eligibility.
(The author is CEO & Co-founder, Paisabazaar.com)