The new financial year begins in April and all, especially millennials, should take this opportunity to bolster their finances and shape up their financial position. Those born between 1980 and 1995 are referred as Generation Y or the millennials. According to a report by Morgan Stanley India, there were 40.7 crore Indians in the age group of 18-36, in 2016. The report also said that India’s millennial population is the largest in the world at 400 million and its spending power is expected to reach $330 billion by 2020.
Starting April, millennials should create a financial plan to put their finances in place over the next 12 months. Yes, we are talking about a plan to take care of your household budget, emergency needs, protection needs and even investment blueprint to keep financial worries at bay during your later years.
Before taking stock of your finances, ensure that you have a household budget in place. Unless you know what are the income sources including that from your spouse and what are the expenses, both discretionary and non-discretionary, putting a number to the monthly investible surplus will not hold water. Unmarried individuals can take stock of their parent’s health expenses including their own life cover if the parents are dependent on them.
In these times of insecurity around private jobs, having an emergency fund equal to at least six months of household expenditure is important. Park such funds in ultra short-term or liquid funds for quick access and tax effective returns. Start now and by end of September 2018, you should have the necessary amount stashed in a liquid mutual fund.
Health, life insurance
The importance of protection cannot be undermined. Opt for family floater health insurance as it suits young couple with kids. Get a life cover which is best met through a term insurance plan.
Now comes the most important part of one’s financial life. As several tax saving investments help not only in saving taxes but also help create wealth in the long term, perhaps starting the exercise in April is best. Sit down with your spouse and write down the various short- to medium- to long-term goals. Remember, from an international vacation every two years to sending your kids abroad for higher studies, every such dream is a goal that can be achieved if planned well in advance.
Calculate future needs
Once you have the goals in sight, estimate its inflated cost based on the tenure. Remember, this is what you need to save for and not the current cost. Now, calculate the amount you need to save every month out of your monthly income. Now watch out for the wrong step forward. If out of the income, if you spend first and then think of investing what is left, the goals are sure to be jeopardised.
Therefore, an easy and a more effective way out to accomplish your goals is to follow the ‘income minus savings’ approach. It keeps your goals on the horizon for you to see them clearly and then steer your expenses accordingly.
In addition to equity mutual funds, make use of the tax savers all along the way. As most such tax savers are long term and have a longer duration, link your long-term goals to them. Further, opt for market-linked equity-linked savings schemes as equities are known to deliver high inflation-adjusted returns over the long term.
Once you have a roadmap for your financial plan ready and have put your finances in place by September end, from next year it will merely be an exercise to review and act only on the diversions and any new liabilities that may have arisen during the previous 12 months. Having a plan in place gives your finances more strength to withstand any uncertain event in the years ahead and to make optimum use of the opportunities that the market provides. And you may just be on the road to an early retirement.
By Sanjiv Bajaj
The writer is VC & MD, Bajaj Capital