What is the costliest thing on this planet which not even multi-billionaires can buy? The answer is time. It is the most valuable non-renewable resource which cannot be purchased. The world is changing very fast and for today’s young generation the biggest challenge ahead of them is that the number of active years in terms of earning has been steadily declining. On the other hand, the starting packages have improved exponentially but this is no consolation as life style expenses today are significantly higher. Also, with the YOLO (you only live once) concept gaining traction, saving from an early age is not a priority. Given this setup, the younger generation is likely to face a few challenges which previous generations may not have faced i.e. running of our money in the sunset years of one’s life.
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Why Financial Planning is Important
Earlier, the life of a salaried person included approximately 35 years of work life. Now that time span has reduced to 25 years. On the other hand, life expectancy is improving thanks to the modern medical facilities. As a result, it becomes very important to start saving and investing from an early age in order to make the most out of years one is actively employed. But the common mistake most millennials make is that they view retirement planning as an activity which needs to done in the later years of life. This is the costliest mistake millennials can probably make. What they forget is that it is imperative to generate a steady stream of passive income post their work life in order to maintain the status quo in terms of your lifestyle and standard of living and for this financial planning is a must.
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Why Starting Early Matters
The basic rule when it comes to creating sizeable corpus is to start as early as possible. The earlier one starts, lesser will be burden in terms of the amount required to be invested per month. This is because after a few years, the power of compounding comes into play leading exponential growth over time. Let’s consider this with an example: Mayura is a 30-year-old with an aim to generate a Rs 1 crore corpus by the age of 60. If she starts investing now, she has to save Rs 1,796 per month (assuming an annual return of 15%). However, if she delays the investment till the age of 50, then for the same amount of Rs 1 crore, she will be required to save Rs 38,466 per month or 21.4 times more than the amount required at age 30. The vast difference here is because of compounding through which an investor can maximise returns.
Most often investors tend to disproportionately focus on returns, which is out of one’s control. What is required is that investors need to focus on what is within their control i.e. staying invested for decades and more. It does not matter how small one’s earnings or savings are. What really matter is how efficiently money is channelled into growth assets and how effectively this habit is fostered. The good thing about starting out early with financial planning is that it gives enough room and buffer for any untoward mistakes that could occur along the way.
Importance of first 10 years
The first 10 years of working life is of great significance especially for a millennial as the number of active working years have reduced. Calculation shows that investing in the first 10 years’ accounts for roughly 75% of the wealth created in a lifetime. For a millennial, if the initial decade turns out to be a lost decade, then they have only 15 years left to see their money compound. This can seriously impact the quality of life one spends in the later years. In effect, frittering away from the age of 25 to 35 is sure to impact your life in a significant manner.
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Importance of Seeking Help
Most often children don’t transparently discuss investments with their parents. In such a case it is important to seek the help of a financial advisor, who without any bias can guide you to your destination. Making the least number of mistakes and staying disciplined throughout one’s earning lifespan will ensure that you can lead a stress free sunset years.
