Financial tips for young adults
If you are in the age group of 24-30 years old, chances are you have not really given enough thought to matters of personal finance. After all, who needs to get into the whole conundrum of assets, liabilities, savings, investments, credit and what not in these glorious years that are meant to be lived up to the hilt? To help us live it up are easily available credit options such as plastic money (read credit cards), loans, zero percent finance schemes etc. But whether we like it or not, life catches up. Yes, we could all wait for that to happen and figure it all out when we necessarily have to; but as Yoda (Star Wars) said “Always in motion is the future…” – the sooner you begin moving towards it with your eyes open, the better is just might be!
Contrary to common perceptions, managing your personal finance is not about having to understand and deal with loads of complexity. It is mostly about common sense, a few clichés and a bit of high school mathematics. Here are a few examples:
Common Sense
• Spend what you can afford
The euphoria associated with the taste of financial independence in the initial years of working brings with it an urge for instant gratification. There are things in life that money can’t buy…for everything else there’s your plastic card. Yes, it’s easy to purchase anything on credit these days but it is always better to save up for the purchase especially if you think you can’t clear up the dues before the interest cost kicks in. Credit cards should largely be used for convenience and not for debt. The interest rates on credit card dues can be as high as 3-3.5% a month – that is a whopping 36%-42% a year.
• Plan your expenses a little
A little bit of budgeting does not require a degree in finance. Keep an eye on your regular expenses and manage them in a way that you know your regular monthly expenditure. This will help you determine where, when and how much you can spend on other than regular transactions as well as your potential for savings.
The clichés
• Save for a rainy day
Put aside a little money every month towards an emergency fund of sorts. Life is full of surprises – both little and not so little and what you put aside can come in handier than you can imagine in such times. Remember that the feeling of financial independence you are slowly getting used to will actually mean something if you can maintain that independence when life springs a surprise.
• You need to help yourself
Be informed. Seek information. Find out and find out more about the financial world around you. Don’t be afraid to ask questions, clarify your doubts. Get to know the basics. Information is no longer difficult to obtain in today’s age. Read up more about concepts like diversification, capital appreciation, asset allocation and the like. If you don’t learn how to manage your own money early, you will always be dependent on others who may or may not be guided by your best interests. You do go about finding out details of the latest mobile phones and other gizmos to satisfy yourself before a purchase – why should financial products be any different?
• An early start is half the battle won…
…or an early bird catches the worm- take your pick! No matter whether its investments or savings or insurance, the early you start the better it is – without an exception. An early start towards regular investments or savings can help you create wealth a lot easier than when you delay it. We talk about that in a bit more detail when we discuss the magic of compounding.
In the case of insurance, both life and health, the earlier you start the lower are the premiums that you pay for insuring yourself. With age, the associated risk to our life and health only increases, consequently making insurance more expensive with age. Most health insurance companies are now providing guaranteed renewals for life once you are issued a health insurance policy and you are most likely to ‘get in’ when young. Another key factor is the existence of an exclusion period (generally 2-4 years) for certain illnesses or medical conditions. One could, most likely, see through this exclusion period without any complications in the early part of one’s life and be covered for such conditions at a later stage.
A bit of mathematics
• The magic of compounding
The sooner you start investing, the easier it is for you to achieve your financial goals as your investments have a longer time period to grow with the magic of compounding. Let us take an example of two young men Suresh and Mukesh, both aged 20 and wanting to have a retirement fund at the age of 55. Suresh invests Rs. 10,000 in the first ten years till the age of 30 while Mukesh invests Rs. 25,000 starting at the age of 30 till age 55. Assuming a 15% annual return on both investments, Mukesh will be able to accumulate only Rs. 70.64 lacs as compared to Suresh’s Rs. 88.39 lacs at age 55 despite his annual investment being 2.5 times that of Suresh.
• Cost of debt
Always keep an eye out on your liabilities. The cost of debt has a habit of creeping up on you unnoticed under the guise of otherwise manageable EMIs. The higher the duration of your loans, the higher is the interest you end up paying. Always try and keep the tenure of your loans to the minimum as that can help you tremendously on reducing your interest costs. With a lower duration of loan, the EMI may be higher but what you would pay as interest over the term of your loan would be substantially lower. It might also be worth your while to read up more on the question of whether you should use up some of your savings to repay debt.
• Savings vs. Inflation
Remember it’s not just about how much you save but where. Money saved in bank accounts or fixed deposits do provide you with a fixed return as interest but the rates provided on these instruments can just about cover the impact of inflation, maybe not even that in times of rising inflation. If you are earning an interest rate of 7% on your deposit and the inflation rate is at 9%, then you are not even covering the loss of your purchasing power on account of rising prices and are in a way losing money.
These are but just a few examples of how a fair bit of logic, information and mathematics can help you move in the right direction. In the end it is about finding enough information to be able to carry out some simple calculations in order to draw reasonably logical conclusions.
“The answers my friend are blowin’ in the wind…!” (with due apologies to Bob Dylan!)