Financial Planning for Millennials
Last Updated : Dec. 19, 2019, 5:20 p.m.
Slowly and Sadly, the Gen X (people who raised millennials), are taking a back seat in the Indian economy. Millennials are taking over the steering wheel to drive the Indian economy. By 2022, India is expected to become the youngest country with an average age of 29. They contribute 46% of the Indian workforce. So, millennials are the people who are going to build the future Indian economy. But, they lack some financial management skills, which their parents learnt early-on in their lives due to the responsibilities that were passed on to them by their parents (or baby boomers). Millennials have had it easy by their parents taking care of most of their expenses and living arrangements, up until the age of 25, in some cases it goes upto 30. This is the reason why their financial habits are weird – negligible savings, no retirement plan, lack of investment and more. Financial planning needs close attention by millennials, not only for their personal good but also for the greater good of their country. Before we dive deep into the matter of financial planning for millennials, let’s analyze the spending habits of millennials.
What are Millennials Spending Habits Like?
Millennials are individuals who are in the age group of 18-34 years (born between 1980 and 2000). They have had a taste of both worlds – Gen X and Gen Z.
While growing up, they have witnessed globalisation hitting India, as a result of which, they saw their parents emphasizing on savings and education. Thus, right now, they are people with higher education rates but lesser employment rates. On the savings front, they have virtually zero balance in their savings bank. Perhaps, millennials believe in making the most out of the present rather than thinking about the future (like their parents). Indian millennials believe that they want to live a better life than their parents because YOLO (an abbreviation commonly used by millennials which translates into – You Only Live Once).
Because of this rebellion attitude and lack of responsibilities – ideas like buying a car or purchasing a house – is of less significance to them. They are environmentally very conscious – reason for not owning cars and using Ola and Uber for commuting purposes. Dependence on technology is what makes them closer to their successors, however, the intensity of involvement is low. Most of the millennials have fitness apps on their phone and watch their favourite shows on phones while commuting to work. They have no inhibition when it comes to shopping online. Long term goals – like retirement planning, childrens’ education, marriage plans – are the last thing on a millenial’s mind.
So, How Should Millennials Make Financial Plans?
Life will be smooth until a point. As times change, people also change. One never knows when he falls in love or gets married or has kids to raise. When these things dawn upon, expenses will start increasing and a concrete plan will be needed in order to cope with it. Dreams and aspirations can only be realized if you’ve a robust financial plan. If you are a millennial and don’t have a plan – Start Right Away, Right Now.
Identify Your Spends: Living on the edge (from paycheck to paycheck) feels good momentary, but not for a long time. There comes a time in your life where responsibilities start piling up. This is where the need for saving arises. Savings can only happen by having a firm look at your financials – how much money comes and how much money goes out every month. Half your financial planning is done by just having a look at your financials. Identify spends that can be postponed or shouldn’t be entertained at all. Spending only on necessities rather than luxury is the start of great financial planning.
Set a Savings Goal: The foundation of financial planning lies in your willingness to save. Savings can help you go through any unforeseen circumstances that you may face ahead. As soon as the paycheck arrives in your account, set aside or allocate at least 20% of your salary towards savings. If it’s a hassle to do every month, give your bank standing instructions so that the money can get debited automatically from your salary account towards your regular savings account . The percentage of savings depends totally on you and the goals you want to achieve. Goals like purchasing a house, will involve higher amount in comparison to wedding, travel plans, buying a car and stuff.
Invest: Money lying idle is of no use. Even if you have money in your savings bank account, that is also not going to generate an immense amount of wealth for you. Only investment in different asset classes can generate good returns. The best part about investment is that you can enjoy the fruits by just sitting, only if the investment is made at the right time and in the right avenue. Speaking of avenues, mutual fund investment is a great way by which millennials can make more money. The average return from investment in equity can bring you a return of 8-10% per annum. There are other liquid fund options that can help you with your short-term investment goals. If mutual fund seems like a risky avenue to you, you always have the conventional investing option to go with like – fixed deposits or recurring deposits.
CASE ONE: A YOUNG MILLENNIAL WITH LESS RESPONSBILITIES
Within one year into his new job, Abhay, a 24-year old fellow, who just finished his masters and got placed in a reputed multinational, is facing a financial crisis. When we sat with him, we got a deep understanding about his financial habits. As you would expect from a millennial – who withdraws a decent salary of INR 30,000 per month – had not even saved a single penny until now. The savings part didn’t hit him until he had to pay a colossal hospital bill for a medical emergency. He also didn’t have any insurance cover. Eventually, the hospital bill was cleared by his parents. Now, he dreads the fact of not saving up. So, we decided to help him out with the below mentioned plan.
1. In order to bring about a big change, one should start analyzing and changing small things. So, we dived straight into Abhay’s spending pattern. He was spending on too many unnecessary things which he wasn’t using. A luxurious lifestyle had put him in debts in the books of credit card companies. Heavy interest and late payment charges were levied on Abhay as a result of not paying the credit card bills. We strictly asked him to put an end to his luxuries for a while and payoff the whole credit card bill amount by borrowing from friends and family.
2. Now that his spendings are under control, we can move on to the savings part. We are going to suggest him a savings plan of 15% (i.e. INR 4,500) every month. This amount will automatically be debited from Abhay’s salary account to his regular savings account. Or better, if he starts a recurring deposit with a bank that offers him the best interest rate. This way he’ll be able to earn more interest (around 7-8% per annum) than a savings bank account. Let’s say, we invest INR 4,500 every month in an ICICI Recurring Deposit plan, which gives him an interest of 6.85% for a year. By the end of the year, Abhay would have saved a total of INR 56,034. This money he can withdraw and invest it elsewhere or continue doing the same thing.
3. Savings can help you deal with your short-term needs. But, remember, there are some long-term needs that cannot be taken care of by just a small amount of savings. And that’s when the need to invest kicks in. Investment helps to create more wealth. Mutual fund investment is a popular and profitable avenue. With minimized risk as compared to stock markets, it gives the investor to make some good returns. In Abhay’s case, he should put INR 2,000 in large-cap equity funds for fulfilling his long-term goals such as wedding or higher education purpose. The tenure of investment should be a minimum of 6 years. For Abhay’s short-term goals, instead of putting his money in RD or FD, he can choose to invest in debt funds. There are many advantages of investing in debt funds – helps in saving tax and offers return on investment in the form of capital appreciation and not only in the form of interest.
CASE ONE: AN OLDER MILLENNIAL WITH RESPONSBILITIES
Within the millennial there are two groups of people, one we have discussed in our previous case. The other kind is the one who’s married and is on a different tangent in terms of their needs and goals. Mr. Firoz – a married engineer, who is 31 years and has two kids – faces a big-time financial crisis and seeks a clearing out of it. He also wanted to buy a house. When we delved deep into his profile, we were astonished to find out the number of personal loans and credit card debts still on his plate. He immediately needed a plan and that to one with no scope of leakages:
1. After going through his overall financials, we saw a lot of his monthly income was going towards the payment of EMIs and credit card bills (close to 40% of his salary) . This needed immediate attention. So, we suggested him to settle off the loan by borrowing from friend because taking more loans will put more pressure on his monthly income.
2. Then next comes in line is the problem of securing the child’s future. Best investment avenue for him to build a huge corpus for the future of both his child. He should definitely invest in a mutual fund scheme that contains a low risk profile for at least 7 to 8 years. It will be the best for him to invest in equity mutual funds.