Debts can be of various types. Millennials want it all and therefore have gotten themselves into Car Loans, Student Loans, Credit Card Loans, Home Loans and Personal Loans. Hence, it is important to distinguish between good and bad debt and not go over board on bad debt.
57% of millennials aged between 18-24 years have less than Rs 50,000 saved in bank accounts for emergency requirements and those have set aside approximately 6-8 months of their expenses as emergency requirements amounting to approximately Rs 5-6 lakh are a mere 4%.
Those in the age group of 25-34 are more responsible, and have lower debt. Those with savings of Rs 50,000-70,000 comprise 47% of the population while 20% of the millennials have higher savings in the bank at around Rs 5 lakh.
Millennial’s hardly save any amount of their earnings. A Bankrate survey found that in the age group of 18 to 29, almost 69% of the people did not have any idea about retirement saving plans or investing in mutual funds. Health insurance, if not provided by the employer, is hardly thought of. 55% of these savings lie in the Savings bank account for between 1-10 years not yielding good investment returns, because they want quick and easy access to their funds and prefer to hold cash than invest.
In their rush to a luxurious lifestyle or acquiring the latest gadget, millennials tend to end up making serious rash decisions of which includes—availing high interest personal loans, misuse of loan facilities, and ultimately leading to borrowing more than what they can payback. Completely oblivious to the effects these actions have on their credit rating and history.
Not only do millennials tread the line of fear and adventure by taking more loans; their savings lie in the savings bank account losing the opportunity cost of better investment options and products.
In order to help millennials from committing such mistakes, here are some basic solutions to the problem. They are:
Millennials should consider refinancing high interest rate and high cost loans with lower interest rate options available. Interest rates are falling and there is better flexibility being provided on loans like MCLR and Benchmark linked rates, which will lead to the reduction the overall interest outgo for them.
2. Debt Laddering
Debt Laddering is taking all loans into account and repayment of highest interest rate loan to reduce interest outgo at high rates first; and then repaying lower interest rate loans in order of Interest rates, period of loan tenure remaining and outstanding amount after considering all prepayment charges.
3. Earning Minus Savings Equals Spending
It would help if millennials’ attitude to savings and investment changes, and their focus lies more towards allocating their cash flows towards committed savings and asset creation or wealth generating assets meant for their future and investment growth rather than creating more liabilities and straining cash flows on dead or depreciating assets which do not create wealth in the long run.