Only 20% of 20-somethings manage to save 10% of monthly income: Study

Many are servicing education or personal loans. It would make more sense to repay debt before investing aggressively

Many young adults belonging to the millennial generation today tend to spend more than they earn. Born into relatively affluent families, they do not suffer from the kind of insecurity that propelled earlier generations to save compulsively, even though their salaries at the same age may have been small. Given their free-spending habits, many youngsters run the risk of falling into a debt trap from which they may have immense difficulty extricating themselves.
 
Meagre savings: Research by Money View, a money management app with over 10 million users, found that only 20 per cent of young adults (aged between 22 and 28 years) save 10 per cent or more of their monthly income. About 40 per cent save 1-10 per cent, while the rest barely manage to make ends meet, or even overspend. “We are bombarded by more advertising today than at any other time, so there is a natural urge to consume more,” says Puneet Agarwal, co-founder, Money View.
 

Swiping merrily: Owing to their free spending habits, many youngsters incur credit card debt at an early age. Sahin Khan, 24, works for a Delhi-based NGO and earns around Rs 35,000 a month. Her necessary spends include room rent, transportation, and food. In addition, a good part of her salary is spent on shopping and entertainment. She also goes on short trips after every month or two. At the end of each month, she is barely left with Rs 1,000-2,000. She has used her credit card to make a few big purchases, and the dues on it stand at Rs 60,000. Every month she pays the minimum charge and rolls over the balance. Credit cards charge three per cent or more interest per month, or 36-42 per cent annually on the outstanding amount. Even though the balance is mounting each month, Khan has yet to realise the gravity of her situation. She airily claims that she will clear her dues when necessary.
 
Today, many young adults spend 30-45 per cent of their salary on entertainment, eating out, travel and other recreational activities. Among young women, a good portion is spent on clothing and cosmetics.
 
Loan burden: Many youngsters today take on loans at an early age, and are blissfully unaware of the need to pay them off on time. Mumbai-based Devopriyo Das, 25, works for an event management company and earns Rs 28,000 per month. Das likes to travel and undertakes weekend trips to nearby places with his friends. He has taken an automobile loan of Rs 80,000. “In case of a vehicle loan, if the EMI is not paid and contact with the bank is avoided for a few months, the bank could seize the vehicle,” says Pankaaj Maalde, Mumbai-based financial planner. Sahin, too, has an education loan.
 
Not every youngster today, however, is reckless when it comes to financial matters. Chandan Maji works as a computer engineer at Madurai and earns Rs 40,000 each month. The 29-year old is fond of cars, but is saving for the day when he can buy one. He has been following a strict investment regime and invests around Rs 12,000 each month. He has a term insurance cover of Rs 1 million. While he does use his credit card, he pays the entire outstanding amount at the end of each month.
 
Pay off debts: Young adults first need to pay off their debts before they can begin to save and invest. It is no use investing to earn a return of 10-12 per cent if you are paying 16-36 per cent on your debt. According to experts, any person who is in a debt trap should first try to shift the liability to a lower-cost loan. Those who have credit card dues, for instance, should convert them into a personal loan, where the interest charge is lower. Higher-cost loans should be repaid on a priority basis. Existing investments or savings should be liquidated to pay off loans.
 
Early beginning gives you a head start, but: “Investing does not offer instant gratification as spending does, so many young people tend to lose patience and stop,” says Anil Rego, CEO, Right Horizons.com.
 
But a delay of even five years can make a big difference to the corpus you accumulate over the long term. For example, if you invest Rs 2,000 a month for 30 years and earn a return of 10 per cent, you will have a corpus of Rs 4.5 million. But start five years later and invest only for 25 years and your final corpus comes down to Rs 2.6 million. On the insurance front, millennials should buy an individual mediclaim policy, even though they may have a corporate cover. Those having dependants should also get a term cover.