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The last two years have been eventful for the whole world and mankind has not faced a situation like this in the last 100 years. Covid-19 has caused a heavy loss of life and along with it has devastated the livelihood of many people around the world. Unprecedented circumstances call for thoughtful actions on the part of people and we will discuss the financial planning tips for millennials for the year 2022.
The millennials are the people born between 1981 and 1996. Millennials are also called Gen Y and constitute 23% of the world’s population. In India, the millennials, account for 34% of the population and are estimated to be around 440 million. They are in the earning age group so would play a key role in India’s growth trajectory.
The millennials have to face increasing competition, peer and family pressure to do well, the rising cost of living as inflation is expected to rise for the nearby future and their personal aspirations are also rising. Many of the problems in life can be resolved through proper financial planning. People go to educational institutions to acquire job skills, cultural norms, and values; but there is no school that teaches them how to manage their personal finances.They learn everything by trial and error and many times land in difficult financial conditions. The New Year 2022 has just started and the Millenials can take care of the following financial aspects to make their life easier.
1) Make Long & Short term goals-
It is important to plan in life. Define the short-term and long-term goals. A good plan will always indicate where you are lacking, which can lead to course correction. Instead of keeping the goals in-memory write them down.
The short-term goals can be like a creation for an emergency fund, rent payment, credit card debt repayment, purchase of goods, travel, and wedding. Long-term goals can be like payment of the home loan, savings for a child’s college education, starting a business, and retirement planning.
Identifying and writing the goals improves the chances of achieving them due to accountability and tracking the progress. You will have an idea of how much money would be required for achieving each goal. If required take the help of a financial advisor.
2) Make a monthly budget-
A person should be aware of how much he is spending and where his money is going every month so that he can inculcate a habit of saving. Make a list of discretionary and non-discretionary expenses.
Non-discretionary expenses are the ones that you don’t have control over and are the needs of a person. These are like the rent, groceries, utility, and gas bills.
Discretionary expenses are the wants and are not required for a person to survive. These can include hobbies, travel, entertainment like movies and theatre, and the luxuries like alcohol, tobacco, and restaurant. A person can cut on these expenses where required.
Knowledge of all the discretionary and non-discretionary expenses can help a person during tough financial situations. In case of situations like the salary cuts that happened during the pandemic, a family can easily identify the discretionary spending and reduce them. Otherwise, too it is wise to take control of the discretionary spending to comfortably reach your future goals.
3) Invest at the beginning of every month-
A good idea is to invest at the beginning of every month and experts say that a person who invests at the beginning of every month is a better saver than who invests at the end of every month. If you don’t plan properly you may not be able to invest a uniform amount at the end of each month where you have to meet all the monthly expenses.
It is better to consider all the expenses that you may have and invest a fixed amount at the beginning of every month. This would help you to curb all unnecessary expenses throughout the month and put you in a habit of saving money. A habit of savings is thus inculcated in a person.
4) Insurance is a must-
The penetration of insurance is very low in India. Just 3.2% of the population has life insurance and the penetration for non-life insurance products is 1%. People consider it a luxury to spend money on insurance as it does not give them any immediate returns.
But the uncertain events of the last two years would have opened the eyes of many people and it is necessary to have an insurance policy. If you don’t have health insurance, hospitalization would eat into the money you would have taken pains to accumulate. Life insurance is also important for the unfortunate event when you are no longer there in this world and the insurance money would take care of your loved ones, helping them to maintain the same lifestyle, rather than run around asking for financial help. Take into account your age and life goals and then have life as well as health insurance.
5) Don’t borrow unless very necessary-
The 2019 Experian consumer credit review found that an average American has four credit cards. Multiple credit cards can be used to maximize rewards points, but that is only if you are savvy enough to manage all the cards and don’t fall back on the payment schedule. In case you miss a payment schedule you would be hit by a late payment fee and your interest rate payment outgo will be high.
Due to the digitization of finances, it has become very easy to take loans. There are many apps to help you to take loans. The loans could be for gadget purchases, vacations, paying medical bills, home improvement, weddings, etc. Don’t take unnecessary loans which you can’t afford to pay back on time. Some people think of taking loans for investing in the stock market. This is one of the riskiest decisions as the liabilities are guaranteed but the returns are not. The stock market may fall without notice and you may be forced to exit in losses.
6) Don’t depend on stock market tips-
The stock markets are booming after the March 2020 crash and the number of Demat accounts in India has doubled in the last 3 years. The Demat accounts at last count stood at more than 7.3 crores. There is a herd mentality and everyone wants to make money in the booming stock market. Instead of doing their own research on fundamentally sound stocks, people want to make quick bucks and depend on tips. There are enough WhatsApp groups giving advice.
People want to become rich overnight and start investing in penny stocks that don’t have sound fundamentals. They start following people who give tips to make quick money. If a person is so sure of making money himself why would he go around giving tips and not make all the money for himself? If you invest on the basis of tips there are chances that you may lose all your money. And what if a person who is giving tips sells out his holding? Would he inform you?
It is always wise to do a thorough research of the company you are investing in and make an informed decision. Follow a disciplined investment approach, have realistic expectations from the market, monitor the performance of the companies at regular intervals, and check the quarterly results.
7) Invest in Mutual Funds-
If you are new to the market invest in mutual funds and let the professionals do their job. It is good to have a well-diversified portfolio according to the goals in life. Don’t have expectations of very high returns. Some new investors have very high expectations.
Rakesh Jhunjhunwala has once remarked, “If I get 18% return I am a king, if I get 21% return, I am an Emperor.”
When the biggest investor in India has 15-18% returns expectations and considers himself an emperor if he gets 21% returns, the other investors should also not run after big unachievable returns.
8) Time spent in the market is important-
Everyone would have seen the ad of cricketer Rohit Sharma where he says “Time spent in the market is important than timing the market.”
People always want to buy low and sell high in the stock market, but the market is volatile with the stock prices changing rapidly and the future is always uncertain. It is always very difficult to predict when the stock has touched the bottom and when it has made a new high.
Time spent in the market does not involve short-term predictions. Patience and time spent always give good returns if the company is good. There is a power of compounding effect and if an investor has kept stock or a mutual fund for many years he would be rewarded suitably with his investments giving many-fold returns. This way the investor would be able to ride the market cycles which is the secret for creating long-term wealth in the stock market.
9) Diversify your investment portfolio-
Diversification is the spreading out of your portfolio thereby limiting the exposure to any one asset class. This helps in reducing volatility. A person can include stocks, bonds, mutual funds, gold, fixed deposit, and cryptocurrency in his portfolio.
Diversification helps in reducing risk and volatility in a portfolio allowing you a peaceful sleep at night. Asset allocation should be considered during diversification. This would depend on the time horizon when you wish to reach your life goals and your risk appetite. It has to be done with proper planning. If you are conservative in taking risks at a young age and put all your money in fixed deposits you won’t have sufficient money at retirement. Similarly, when you are too aggressive in investing at an older age your savings would be exposed to market volatility and at an older age, you will have less time and will to recover the losses.
10) Retirement Planning-
Many of today’s youth believe in living for the moment rather than saving and planning for the future. It is necessary that they plan for retirement.
Most of the countries have aging populations with increasing longevity. People nowadays expect to live longer due to advancements in medical technologies. The problem is that the interest rates are very low which are not able to meet their financial requirements after the retirement age. So it becomes all the more imperative that they invest in pension plans.
It is important that the youth start saving at the earliest when they start earning. There is the employee provident fund and the National pension scheme that help persons to secure their future.
If a person has not started financial planning for the future he can start now as it is never too late. Proper financial planning would make life easier for you and your family in the future in case there is no regular source of income. You would be able to tackle emergency situations heads on when you have financial strength. These are some of the financial planning tips for the Millenials for the year 2022.