If you are a millennial and have started earning recently, chances are you spend most of your salary and you don’t even know where exactly you are spending it. Most millennials start earning by the time they are 21. The average graduate joins as a fresher and gets a salary of 30,000 - 40,000 per month. But none of them are serious about planning their budget and expenses, making investments, buying insurance and saving for retirement.
Now an average saving and investment rate of 10 - 15 % with a return of 20% yearly can secure your retirement within 20 years. .
The bare minimum to avoid disaster
The basic tendency of human psychology with concepts that are intimidating is to ignore them. For Example - if you compel yourself to understand your finances the answer might end up being that you really can’t afford that fancy car or bike or that apartment is way out of your budget. You might not like this answer and end up ignoring the facts. That is exactly what you need to avoid, it's almost like setting yourself up for financial disaster or worse a debt trap.
Basic philosophy of Personal Finance is to Live below your means. Never spend more than you earn .
Sit down and calculate your AFTER TAX INCOME.
Then make a list of your expenses, monthly. For this I would urge you to get your Bank account statements and group your expenses in 4-5 categories like - Eating out, Alcohol and Cigarettes, Entertainment, Rent, Groceries etc. you will be surprised to see that your assumptions about your expenses are way off.
Now your goal is to make sure that your Income > Expenditure.
Whatever is the difference you can save that amount and start investing it .
Why Financial Planning is Important
The goal of planning your finances right when you start working is to eventually attain the freedom to do what you want and not be obligated to monthly EMIs and liabilities that make sure you keep working on a salary for the next 25-30 years.
Think of what really makes you happy - is it a fancy car or an apartment that you’ve seen ? Or is it the freedom to do whatever you want ?
A lot of people that you see with fancy cars and houses aren’t actually happy because they are tied to these assets and their EMI’s. They don’t sleep peacefully because they are always under stress to pay back the loans. Ask yourself - do you want that kind of stress in your life ?
“The three most harmful addictions are heroin, carbohydrates, and a monthly salary.”
Nassim Nicholas Taleb
So when you do start working , you might be tempted to buy that dream car or a fancy apartment but you must understand that the joy and satisfaction you get from these things will only last for a few years, but the EMI’s for them will last much longer than that.
Instead you must think of saving for your freedom - to be able to do what you’ve always wanted and not worry about money. It’s possible if you manage your finances well for a decade or two. Yes, it’s a slow and lengthy process that is also boring and filled with lack of excitement but it’s the grown up thing to do. And as much as you hate it right now, you are officially a grown up. So might as well embrace it.
Minimize your expenses and save the money instead.
Follow these steps to start your Personal Finance Management Journey
1.Create a budget - You know what you bring home every month , after tax. Create a budget out of this income and make sure your expenses never exceed this budget
2. Track your Spending - keep a track on your spending habits and expenses. See if you can cut down on some of it and save that money instead. Always make sure you’re spending less than what you earn. Live below your means.
3.Manage your Debt - If you have taken loans on a big purchase like a car or a house. Then make sure your EMI’s are paid on time. If you are using a credit card , always pay your bills on time to avoid being charged compund interest on your credit card borrowings.
4.Plan for emergencies - Life can throw many surprises your way without any warning. There can be a medical emergency or an accident or some unplanned big expense for your family. Always try to prepare yourself for these scenarios. Buy Life , term and health insurance policies for yourself and your family members and pay the premiums on time. We will do a separate article on different insurance policies and how to make sense of them .
5. Investing - You can define your short term, mid term and long term goals clearly and then make investments according to these goals. Remember Investing is different from Trading, you are not a trader , your best bet is to pick a few good companies and to start investing small amounts in them every month. If you can do this consistently over a long period of time, you will have taken care of your retirement and long term goals.
6. Retirement Planning - Save and invest in income generating assets like equities to secure your future and retirement. You can make monthly payments to SIPs or invest a certain amount every month in Mutual Funds. You can also alternatively buy a certain number of stocks every month of a few selected companies that you are sure will grow with time and give you good returns .
Building a relationship with money is one of the most underrated skills in the world. You must understand how money works and plan your life accordingly . It is not rocket science and can be understood by a layman as well as finance experts. Once you do understand concepts like Inflation, Investing, Insurance, Compound Interest and Time Value of Money - your outlook on Money and your relationship with it will change drastically . We will cover all these topics in our subsequent posts. keep an eye on this space for more.