Young earners want to be financially secure and well off by the age of 35-40. Therefore, it is important for them to be educated not only on the importance of spending smartly and saving, but also investing keeping goals in mind.
Today’s generation has started working and earning from an early age. Most of the money decisions are taken by themselves, leading to a sizable portion of cash flows being spent on having a better quality of life ‘Today’. As a result, savings as compared to the overall income is very low, and there is little focus on long-term financial goals and investing towards the same. However, at the same time, the young earners want to be financially secure and well off by the age of 35-40. Thus, there is a gap between the mindset of being financially secure in the 30s and planning for the future in the 20s.
Since this generation is financially independent, it is of utmost importance that they are educated not only on the importance of spending smartly and saving, but also investing keeping their goals in mind.
We have highlighted a few principles that young earners should follow:
1. Set Long-Term & Short-Term Goals
Young investors can start by identifying future goals with the help of an experienced financial planner. Identifying goals early in life gives one a savings target to work towards, and gives some purpose to investing. Once the goals are defined and time horizon is clear, investments can be started towards these goals. For example, you can start investing in liquid funds if you have a vacation goal which is a few months away, and in equity mutual funds to accumulate a corpus for long-term goals which may be after 5 or 7 years.
2. Start investing early
Starting to invest at an early age is the one of the key principles of investing. We believe that the long-term performance of your investments depends on your time ‘IN’ the market, rather than ‘Timing the market’. Time creates money. The longer you stay invested for, the more number of years your investments can grow, and the magic of compounding can get factored into the long-term returns of your portfolio.
|Investment Start Age||Investment Amount (Per Month)||Corpus Accumulated at the age of 50 @ 12% p.a.|
|Rs 1 Lakh|
Rs. 18.79 Crore
Rs. 9.89 Crore
As seen above, just by starting to invest 5 years earlier, (i.e. investing Rs 60 lakh more in total), your accumulated corpus can be double.
3. Prepare a Savings Budget
Warren Buffet gave the best advice, any young earner can be given, when he said – “Don’t save what is left after spending, but spend what is left after savings”. One should first set aside a portion of his/her income as savings towards goals, and then spend the balance amount. Most people spend first, and then save what is left. Following the savings first budget will inculcate discipline in money habits and steady investments will ensure long-term wealth creation.
4. Manage your expenses
Today, all of us have easy access to credit cards, online shopping portals, and easy online pricing comparisons, which leads us taking purchase decisions much faster. In the world of electronic payments, the young earners are infrequently touching and feeling cash. In general, one feels the pinch more when we pay in hard cash as compared to just swiping a card. Thus, it has become even more important to manage your expenses well and not give in to impulsive spending.
5. Tax Planning
Tax Planning is a very important aspect of managing your finances. By proper tax planning, you can not only reduce your tax liability, but can also build a corpus for your goals. One of the highest post-tax yielding instrument to save tax is Equity Linked Savings Scheme (ELSS).
Apart from the above principles, one should also set aside a corpus that can be utilized in case of any emergency or to meet any health-related expenses.
The above principles, when followed by young earners, will help in inculcating the habit of saving from an early age, streaming cash flows and creating wealth in the long run.
(By Amar Pandit. The author is CFA and Founder & Chief Happyness Officer at HappynessFactory.in)