Starting on a clean slate
When embarking on your financial life, chances of committing mistakes exist. Make sure you do not repeat them
By Preeti Kulkarni
When you are in your 20s and working, the money you earn never seems to be enough to save, forget planning finances for the future. Newly found financial freedom, career and relationships seem far more important and right, resulting in financial life being overlooked. Most youngsters would believe that they can get their financial house in order once they settle down and start their ‘real life’. After all, it may not seem like there is that much money to manage—you may not be making much money at your first job and the list of things to buy and own is simply too long to think of savings, let alone investing.
At 27, Mumbai-based Khushali Pandit comes across as any other girl her age—focused on her career, loves to hang out with friends and has dreams that she is working towards. “I want to do a PhD in Genetic Engineering and increase my income considerably by 2020 to pursue it,” she says. Contrast this confidence to her finances—two years ago she realised that she needs to save more and spend less. “I have realised the importance of being disciplined in terms of saving regularly,” she explains.
In Kolkata, Chartered Accountant Priyank Singhi is the same age as Khushali; he has an edge over her because of his background in finance. “The first and foremost thing towards achieving my financial goals is setting small milestones for myself and understanding my financial condition,” he rattles off like a pro. But, the confidence stems from the few financial mistakes he committed before acquiring this degree of authority. The biggest advantage that those who are just starting off in their career have over others is time and the fact that they start on a clean slate.
Start planning finances
Young individuals with little or no responsibilities often run the risk of being reckless with spending. Just the way one plans their career, phone upgrade or going out with friends, they should plan their financial future. “Everybody needs a financial plan; it’s like getting up in the morning and brushing our teeth.
In case of people who are single— the importance could be about understanding the fact that sooner or later you are going to reach the subsequent stages of being married, having kids and then further,” says Mimi Partha Sarathy, founder and MD, Sinhasi Consultants.
One of the weirdest comments one hears is, “I don’t understand finances.” This is a bizarre excuse, which many people have made even in later years of life, especially when money plays such a huge role in our lives. Make a start by educating yourself about personal finance than procrastinate or expect someone to do it for you. Yes, people could help just the way your domestic help assists you in the kitchen, but you learn to make food the days she is on leave. Think of finance in the same way rather than become a sitting duck for someone to outwit you with your money.
In February 2017, Outlook Money conducted a survey on how young Indians save, spend and invest money. The outcome was pretty interesting, especially when it came to spending, where the majority was clear on what they wanted to spend on and how much. There is nothing wrong in spending money that you earn, as long as you understand the difference between spending on asset building and asset depleting expenses. “Youngsters have financial goals with very short time horizon like buying a luxury car in two years,” points out Sanjiv Bajaj, MD, Bajaj Capital.
To avoid falling into the trap of overconsumption, identify your current needs and future financial goals. “Write down a list of all the things that you would need to feel secure, happy or fulfilled.” advises S Ramakrishnan, head–retail banking and wealth management, HSBC India. Also, do not miss out on creating an emergency fund. It should be able to cover at least six months’ expenses. Emergencies could be a sudden medical crisis, job loss or even the possibility of finding your bachelor pad minus the two roommates, resulting in you paying for the whole flat, that you may not be in a position to afford.
Avoid these mistakes
Do not procrastinate—get down to drawing up a financial plan as soon as possible. “One of the most common mistakes made by singles is that they think they do not need a plan. It is advisable that one gets to know the nuances from a young age. Don’t postpone financial planning,” cautions Partha Sarathy. By delaying savings and investing, you are giving your money lesser time to automatically gain from the concept of compounding.
Let’s understand compounding by assuming you invest Rs 5,000 a year starting at age 25, which grows at an annualised 6 per cent. You will have approximately Rs 8.2 lakh by the time you’re 65. Now let’s suppose you delay saving by ten years; you will need Rs 9,800 a year to wind up with the same kind of savings at 65. So, those who believe that they will start saving and investing when they have more money, do not be deluded by such a thought because unlike 25, when you are single, chances are that at 35 you are married, with a kid or two, and staring at many more financial needs that will be demanding your money.
Do not blindly buy financial products. You do not need life insurance until you have financial dependents or have stacked up a liability, like a home loan. But, you need health insurance at all times. Do not make the mistake of assuming that your healthy lifestyle eliminates the need for health insurance. “With an increasing trend of ailments in urban areas, owing to pollution (respiratory), lack of sanitation and clean drinking water (cholera, typhoid, etc.) and vector borne diseases (malaria, dengue, chikungunya), people of all ages are susceptible to falling ill,” points out Anuj Gulati, MD and CEO, Religare Health.
Ensure you have an independent health policy even if you are covered under your employer’s group policy. “Even if it is adequate to cover your requirements, you can never tell when there could be a gap in your employment. An incident involving hospitalisation while in between jobs can be financially stressful,” adds Gulati. If you live in a metro city, look at buying a health cover of at least Rs 5 lakh. This is not a onetime exercise that you can forget after taking a policy—review your cover at important life milestones such as when you get married, have children and are approaching retirement.
As new tax payers, you will be overwhelmed about maximising the tax deductions available under Section 80C of the Income Tax Act. This should be your definite hunting ground to maximise your savings and investments in a tax efficient manner, which could be aligned to your financial goals and plans. There are several types of financial instruments in which you could park money to save on taxes. Use the concept of paying yourself first— make most of savings towards your retirement. This is automatically taken care of for the salaried as they contribute towards provident fund from their first paycheque.
Once your emergency savings and insurance is taken care of, you should consider focusing your investments into equities as an asset class. Not only does it have the power to beat inflation in the long run but also has the necessary trait to build sizeable wealth. When planning tax savings, consider investing as much as you can into equities. Being single, you have fewer responsibilities and the capacity to take on higher risks. “Of the take home salary, at least 50 per cent must be saved and added to a corpus. You should allocate a larger amount of savings to equity oriented investments,” advises Amar Pandit, founder, Happynessfactory.in.
Singhi has already set out on this path and has charted out a roadmap to achieve his key goals— creating multiple income streams and planning for retirement. He has taken inspiration from the famous investor Warren Buffett and has started investing. “Everyone should try and save 25 per cent of what they earn and start investing the same in stocks,” adds Singhi. One way to start small when investing is to use the systematic investment plan (SIP) mode to invest in mutual funds.
Every individual is different, so naturally everyone is going to have different financial goals. But by setting aside sums, even if small, regularly right from the time you start earning, you set the stage for a big corpus in future. The habit not only inculcates discipline in approaching your finances in an efficient and logical manner, it also makes you address your future financial goals without compromising on any of them. Khushali has also made the shift to SIPs in mutual funds from her earlier fixed deposits fancy. Make a start today when you are close to a clean slate; the chances of realising you financial dreams will be a lot more high and easy to achieve.
Essential PF checklist for singles
- Draw up a budget and stick to it
- Pay credit card dues in time and do not borrow beyond your means
- List out your financial goals with timelines and cost of goals
- Do not blindly save or invest in the garb of saving on taxes
- Start saving for your retirement with your first paycheque
- Equip yourself with the basics of finance