Capital Account: Uma Shashikant

Disciplined saving, sensible investing

My nephew is getting married this month. But the excitement of beginning a new life has been somewhat overshadowed by his anxiety to manage finances.

His parents are spending on the wedding, as most Indian parents do, but he is not sure about dealing with the expenses lined up: honeymoon, parties, return gifts, and not to mention the increased expenses of running a household. He has taken a car loan, and hopes to drive his wife to their new home in his new car. He feels he and his wife would pool their incomes, and pay up the equated monthly instalments (EMIs) on their car and home, and manage a good lifestyle. But he has still not spoken about these to his fiancé. So, when she told him about a second car that she would buy for herself, his heart sank. How does a young investor prepare for these financial goals, which hit you at the same time?

For youngsters, who may have only a few years before stepping into the territory of running a household, there are three useful guiding principles.

The first principle is about timing and prioritising. For someone who has lived in comforts, provided by 50-year-plus parents who are at their peak of the wealth pyramid, starting a household from scratch is a challenge. Instead of hoping to start a new life in your own fully-furnished flat, it is important to prioritise. A rented flat may not be a bad start, after all. Not only does the high EMI gets saved, but the flexibility to shift locations, as job opportunities arise, also increases. It may be important in the early years of one’s career. Expenses on a house, car and lifestyle need to be unbundled, so that they are dealt with gradually rather than hitting your wallet overtime.

The second principle is about ensuring adequate borrowing capabilities. When there is a need for a huge expense, it should be easier to seek a personal loan, which can be repaid in instalments.

Many youngsters tend to be reckless with their credit cards in their initial earning years. Later, they find themselves not being able to access loans at reasonable rates when needed the most. Their credit history is spoilt by irregular payments, delays and defaults.

It is also important to ensure that home, car and personal loans do not freeze your ability to take more loans, if needed. A home loan, taken too early, can create serious inflexibilities. Also, many youngsters tend to have many bank accounts, one for every new job. Creating a solid banking relationship, where the bank knows your cash flows into the account over time, is the basis of a deeper engagement, where the banker is more confident of lending.

The third principle is about creating an adequate asset base. A healthy saving and investing habit can never be overstated. If most income in the early earning years is spent away, or used to fund depreciating assets such as cars, phones and accessories, there is little to lean back on during need. At least a small portion of the income should be put aside in deposits, mutual funds and bonds, which can be liquidated or used as collateral to raise funds. Buying many insurance covers in eagerness to save taxes can be damaging. Paying a premium to sustain the policies gets tougher during a lean period, and a low or nil surrender value makes insurance policies a poor choice for releasing money when needed. Disciplined saving, however little it is, and sensible investing are key to dealing with unexpected expenses.

My nephew wishes he had thought of these simple principles when he started to earn. Perhaps, there are others for whom these tips could prove timely and useful.

The writer is managing director, Centre for Investment Education and Learning. Views expressed are her own