One of the best things about being young and reckless is…well you’re young and reckless, and that’s about all that’s required to make life enjoyable. But sooner or later, we have to shed that ‘reckless’ tag and take responsibility for our lives.
Generally, that happens when a person begins to earn his or her own living – and a big part of growing-up is taking full financial responsibility as well. After all, earning money, as a lot of youngsters realise, is the easy part. What is difficult is not letting it all melt away.
So what are the things you, as a young adult, can do to take control of your finances and make your money work for you, rather than working for your money? We present 6 tips that we hope will help you in this endeavour.
Live within your means
Too many youngsters make the mistake of living, not within their own income, but that of what they hope to earn five years hence. Yes, if you work hard you will double your salary by the year 2020, but that does NOT mean you spend money in 2015 as if you are already at that level.
So step back and wait on your purchases. Do you really need that car or are you doing fine with the two-wheeler? Is that fancy smartphone a necessity or a luxury? Dining out once a month as opposed to once a week can save you a lot of money.
Buy life insurance – but don’t buy life insurance.
This one’s tricky. Your parents probably bought LIC policies in your name when you were younger (and if they did not, well, this point just became much more important). But that was probably an endowment plan, where they – or you – paid a fairly large sum of money every year in return for some promised large pay-off when you turn forty-five. Even if they did not, the first time you go to your bank branch, it is virtually guaranteed that someone will try to sell you an insurance plan to ‘grow your wealth’.
Do not buy it.
Insurance is meant for one thing, and one thing only – to help your dependents recover from the financial shock of your death, if it happens. So you must buy an insurance cover, but go for a ‘Term’ policy. While the detailed difference between a Term policy and regular Life Insurance could be the subject matter of a whole separate article, in brief, a Term Policy has much lower premiums, but only pay out money if a death claim is made. Even so, it is much better to opt for this, and do it when you are young, since the premium rises as you get older.
Open a Recurring Deposit
Probably the least glamorous advice you’ll ever get. In a world with snazzy investment options and wealth plans, why an old-fashioned RD? Well, it is like a forced saving without being too big an outgo from your income. Markets are volatile, and a certain part of your income (say about 10%) should ideally go into a safe investment option like an RD with a large bank.
Start an SIP in a Mutual Fund
For all the volatility mentioned in the point above, investing in the stock market is a virtual necessity if you want your returns to beat inflation. But direct investment in shares can be tricky, even for those of us who are familiar with the market. A more sensible option is to start a monthly ‘Systematic Investment Plan’ in an equity mutual fund. At a young age, go for an aggressive, equity-oriented plan, with a growth option rather than dividend payouts. Most banks do have a mutual fund desk, even if they do not push it aggressively as compared to Insurance, as do a lot of brokers, and they can help choose the right fund for you. An SIP can be started with as less as INR 500 a month, but put at least 5% of your monthly income here, ideally more.
Avoid credit card debt
This is another point that deserves its own article, but the importance cannot be emphasised enough. Credit cards are useful, provided you only use them to the extent you can pay off the balance in the same month. Interest rates on credit card debt are ruinous – upto 30% a year – and an outstanding balance of a few thousand can quickly spiral into much more.
Buy medical insurance
Remember that line of mine at the beginning about being ‘young and reckless’? Well, the recklessness does not disappear overnight. And when you’re reckless, bad stuff can happen. An accident, an overdose, a bad decision, all of these could land you in a medical emergency. And sometimes even if you are not reckless – well, life can be pretty cruel. Tuberculosis is rampant, H1N1 is an unfortunate reality, dengue comes and goes…the point is, anything that requires hospitalization is expensive. It can melt away your savings, even leave in debt – and it may not just be you – your parents might be dependent on you, or your spouse or children, if that’s where you are in your life. So medical insurance is not an option – it is a necessity. It is possible you’re covered in your employer’s medical benefits scheme, but even so, go through it closely to see which family members are included and what medical conditions are covered. For the rest, buy a policy.
In the final analysis, remember that you should be expecting to live a long life, and as much as it is fun to live every day like it is your last, it probably will not be. Maybe you will feel like you’re living too frugally in your youth, but it is better to be young and prudent, than to be old and poor.