Millennial’s Guide to a Healthy Financial Future

Start early, set goals, get a grip of your income and expenses, and make your plan by diversifying allocations

Millennial’s Guide to a Healthy Financial Future
Akhilesh Gupta 25 May 2021

Unlike their predecessors — who were more inclined towards protection and preservation of wealth — millennials are perceived as a generation that believes in ‘living in the moment’. This generation also considered instant gratification and easy monthly installments as the main mantra of happiness.

The Covid-19 pandemic has put them in the eye of the storm and left many of them worried about their financial situation, both in the short and long terms. According to the Deloitte 2020 Millennial Survey, 80 per cent of millennials said they were stressed about their finances, as their priorities are different from those of previous generations.

The concept of personal finance is something every member of Generation Y needs to understand. However, if some wealth creation-related guidelines are followed, it is quite possible to secure their financial future and leave a legacy. Here are a few tips to help them make wise investment choices and get a clearer idea of where, when and how to safely invest for their future.

Get a grip of your finances

Before you set any financial plan in place, it is vital to understand your current financial situation. Many people lack awareness of their personal finances, which makes it incredibly difficult to make any long-term financial plan. So, the best place to start is making a note of your income and expenses. This will help you understand exactly where your money is going, and most importantly, enable you to develop a realistic financial plan.

Power of compounding

By definition, compounding means that returns on investment earned on the initial amount gets reinvested and earns further. Thus, it starts a self-propelled chain where money automatically works for the investor. The sooner you start savings and investments, the more time you will have to reap the benefit of compounding. Moreover, having a longer investment horizon beats inflation and other market cycles.

Make saving a habit

The golden rule of personal finance is — save every month. No matter how big or small your income, you should get in the habit of saving. If you are just starting your career, you can save as much as 40 per cent of your salary. However, as you proceed and other commitments enter the picture, you can drop down to 15-20 per cent. These savings will come in handy as you progress in life.

Build an emergency buffer

An emergency fund provides a safety net for you and your family, and should be given high priority. For eventualities and chance events that require immediate liquidity, you must have an emergency corpus in place. Generally, it is considered that you should have at least 6 months of expenses invested in liquid assets. Moreover, medical expenses are increasing at a very fast pace, which makes having adequate health insurance important. One should buy insurance at a young age as the better the profile, the lower the premium you have to pay.

The importance of insurance

This is a small investment that can reap great long-term benefits. Additionally, considering how natural disasters around us are increasing, this is also an asset that can save us from great financial difficulties in the future. The current pandemic has helped amplify the need of maintaining an insurance portfolio.

Every individual, no matter what stage of life he/she might be in, should make it a practice to regularly invest and update their insurance coverage. An insurance policy should be taken based on careful consideration of one’s individual lifestyle, habits, health history, dependent family members, claim settlement turnaround time and amount of coverage. Insurance cannot be an option anymore; it has to climb up the ladder and become a priority.

Allocate assets and invest smartly

One should not keep all eggs in one basket, ie., allocate assets to different investment avenues as per your risk appetite, across debt and equity. Inculcate a strict regime of investing some money in assets like stocks, gold, mutual funds or bank deposits that generate money as they grow. The ideal goal of investing should be to amass wealth for retirement. That’s why, one should invest in plans that have a long tenure.

Understand how taxes work

To legally save taxes is your fundamental right. It is critical to understand how it works. You need to calculate how much money you will be getting in hand after tax deductions and then plan your budget and financial goals. Moreover, getting a grip on taxes can also help you claim appropriate deductions. One needs to know of all deductibles offered under sections 80C and 80D, such as ELSS, NPS, PPF, interest deductible on first home loan, children’s tuition fees, etc.

Right now, the world is uncertain. But if you control what you can, you can prepare for better days ahead. Invest your time to find an adviser or financial professional who is the right fit for you, and come up with a plan. Commit to a budget, make savings a habit, invest in insurance and manage risks and returns. While the pandemic continues to impact the economy and dominate headlines, with these tips, you can be on your way to a healthier financial future.

The author is Chief Investment Officer, Aviva India

DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.