Financial Planning for Millennials

The views and opinions expressed are of Mr. Arun Thukral, MD & CEO, Axis Securities.

As one of the fastest growing economies in the world, India is at the center of much global interest. Increased investments and development initiatives are creating opportunities for Indians leading to an improvement in their income levels. Millennials, comprising 46% of the workforce, are the primary beneficiaries of this economic growth. 

Today, millennials are taking home pay packages higher than their predecessors. But it is not just their salaries that are swelling. With their soaring aspirations, millennials are relying more on debt products to fulfill their expectations. Driven by a need for instant gratification, their approach towards spending and saving is quite different from the previous generation. However, contrary to the perception, millennials are not frivolous about money matters. 

According to a study, 80% millennials regard ‘wealth’ as the top life goal. Even though they are aware of the need to plan their finances to create wealth, various financial traps set them back on this journey. With disciplined money management, however, any goal can be accomplished. Below are a few simple steps that millennials can take in their pursuit of wealth creation:  

Have a plan in place

Apart from wealth creation, millennials pursue a host of other short-term goals as well. Travel, higher education and latest gadgets top this list. While it is good to have clarity on goals, without a detailed plan of action, these goals will be nothing more than a fantasy. Start off by listing your financial goals. This list will help you to weed out goals which seem important in the short-term but may affect the process of wealth creation in the long-run. Figure out which items are within your reach and which would require time to meet. Next assign each goal a timeframe, dividing them into categories like short-term (less than a year), medium term (3-5 years) and long-term (more than 7 years). This will help you to select the right investment instruments to accumulate requisite funds within the stipulated time. To create wealth, ensure that you do not compromise on your long-term financial stability for short-term indulgence.  

Invest wisely

A study points out that even though they have lofty financial goals, 57% of millennials still park their money in fixed deposits. While it is crucial that you invest to make your money work for you, the key to success in this process is selecting the right investment options. A simple online search will reveal that FDs alone cannot help you to accumulate inflation-beating returns. If wealth creation is your goal, investment in equity instruments is imperative. To give you a perspective, from 1979 to 2018, when average inflation stood at ~8.1%, FDs offered an average return of 9%,  gold offered a return of around 10%, real estate investments offered ~13% while equities offered 16% returns in the same duration. In spite of its superiority as an investment option, many investors are wary of equities. Millennials, however, being savvy and more willing to explore new options are better equipped to tap the potential of equity. With some research and advice from experts, invest in fundamentally strong stocks to build long-term wealth.     

Have patience 

Wealth creation is certainly not an overnight exercise. It takes time and requires patience. Regular investments, with an expectation that they will appreciate in value over time, is at the core of the wealth creation process. It entails the acquisition of assets like equity, gold, real estate, etc. believing that their price will go up in the future, creating wealth when disposed of. Since it is a long-term process, it is advisable to not get perturbed by short-term fluctuations. This is all the more crucial when it comes to equity investments. Any short-term market correction sends investors into a panic mode leading to an unwise ‘sell’ decision. Just remember that even after going through a number of recessionary phases, global equities have given more than double the returns on an average per year. Other assets like gold and real estate too go through fluctuations in value. Hence, to succeed in this endeavor, hold on to good quality assets for a long-term to achieve growth in wealth. 

Break the debt cycle

Armed with credit cards, millennials are indulging in expensive transactions which they cannot afford. Relying heavily on credit cards for impulsive transactions can compromise your future financial prosperity. Hence, use credit cards only for unavoidable, big-ticket transactions. Limit the number of credit cards to one or two. Make payments on your cards ahead of the due date to avoid ballooning debt. For other liabilities, like home/personal/education loan, carefully understand the terms and conditions from your bank. Compare the interest rate offered by various financial institutes before taking a loan. Once you go for a loan, ensure that you honor your monthly EMIs to avoid penalties. In case you get a windfall lump sum payout, like a bonus, instead of indulging, prioritize loan repayments. Start by paying off the highest interest loans (usually a credit card), and then work your way down to the lower interest ones. A debt trap serves as a drain on wealth creation making it important to break the cycle at the earliest.  

Check your money habits 

For wealth creation, it is necessary that you make regular investments.  But when you are struggling with maintaining your monthly expenses, savings and investments seem a bit far-fetched. It, therefore, becomes vital that you keep a check on your money habits. Track where your money is going. Maintain an account of daily expenses to identify which spends to avoid or minimize. Make a rule to compulsorily divert a certain portion of your salary to savings as soon as you receive your paycheck. Aim to save at least 20-25% of your income every month. Review your finances regularly to check the progress that you are making towards your goals. Make sure that you understand your tax structure well, to minimize the overall impact of taxation. 

Raise your financial awareness

While millennials are more aware of the need to plan finances, there is still some work to be done in raising financial awareness. Knowledge of different financial concepts is important to make better investment decisions. There is a lot of content available to help you clarify your doubts and understand the implications of your choices. Instead of relying on investment tips from your friends and relatives, do thorough research to select the best options that align with your goals. By actively seeking information, you can avoid various pitfalls that you may encounter in the process of wealth creation.

While millennials have a clear advantage over their predecessors in terms of greater exposure to financial markets and information, they can learn a lesson or two from the discipline of their parents. Combined with their willingness to learn and experiment, a systematic approach will help them to support the lifestyle that they aspire without giving up on future financial well-being. 

Originally published in DNA Money, May,19.