Chetan (25) and Mehul (25) work at a similar designation in the same company, earning a salary of Rs 35,000 each. Yet, after working for nearly three years, Chetan has been able to save around Rs 4.5 lakh and is without any debt, while Mehul has been able to save only around Rs 1 lakh and carries a car and credit card debt of around Rs 4 lakh. Chetan has clearly earmarked funds for his wedding, planned after two years, while Mehul believes that there is no need to plan for the same as any shortfall can be made good with an instant personal loan.
The above example clearly indicates that, while Chetan is very clear about his goals and believes in planning for the same. Mehul, on the other hand does not have a clear picture of his goals and believes that since he is young, he can decide or plan later. Two people of the same age, with different attitudes about their financial lives.
India is a land of young people with an estimated 50 per cent of our population below the age of 25 years and most of them have a low level of financial literacy. We have often heard the famous quote that “An early bird catches the worm”. This simply means that if you begin early you can finish your task comfortably.
THE POWER OF COMPOUNDING
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At a young age, most people do not have very high expenses or too many responsibilities. Yet many are not able to save because saving is done after expenses have been taken care of and most of the time there is hardly anything left.
The reasons for not being able to save can be:
What’s the way out?
Write down your financial goals: Financial goals are milestones in your life such as marriage, buying a house, etc which have some economic value and for which you would require funds. Though it’s difficult for most to even think of later events such as children’s education or retirement, the very fact that if goals are defined early then the investments can be done in the right assets. Consult a financial planner who can help you set financial goals with a specific time frame.
Spend what remains after saving: For young people, basic monthly expenses are limited and in most cases even their parents are not dependent on their income. The best way is to start a recurring deposit scheme in a bank if you have planned for some financial milestone, like marriage, in the near term. Or invest in a Systematic Investment Plan in equity mutual funds if you have long term goals, such as buying a house after five years.
Learn about the power of compounding: The best thing that young people have to their advantage is time. Investments done at a young age for the long term can get compounded to huge amounts, over time. For example, Rs 1,000 invested for a period of 10 years at 10 per cent can fetch you Rs 2.04 lakh.
Right age to invest in equity: Equity is the best asset class when invested for long term. A good stocks portfolio can be built over several years for long term goals such as retirement. Equity is also best suited to beat inflation and give you superior returns.
Parents can play a major role by sharing their money experience with their young working children and assist them initially in starting investments and make them visualise their possible financial milestones. The initial push will help the young a long way in establishing a sound financial life.
The writer is Chief Planner, Proficient Financial Planners.