FINANCIAL TIPS FOR THE CAREFREE YOUTH
1. Ground reality
· Often, a youth's salary doesn’t leave too much room for savings and investments.
· Also, newer lifestyles are more expensive, and the social pressure to consume and spend is much stronger.
· The urge to save is also less, as there are very few urgent financial needs when young.
· Mostly, they start thinking of money when faced with financial problems like educational loans and consumer debt, mostly in the form of credit card expenses.
2. Rule number zero
· It comes before any other rule, and is that credit card debt is financial poison.
· It is the single biggest problem that destroys young people’s finance.
· The interest on credit card debt is 3.5% per month, that is, over 50% per annum.
· As no investments can give you these returns, you must pay off all credit card debt before investing your money in anything.
· Conversely, if your credit card balance needs to be rolled over, then you must liquidate an investment to pay off the entire credit card amount.
3. Goals
· This phase of life should have two goals - emergency covers and long-term investment.
· Emergency covers take two forms – insurance and contingency fund.
· Long-term investment should be in the form of equity mutual funds.
4. Insurance
· Insurance should take two forms - term insurance and health cover.
· Neither is compulsory - it is entirely possible that you do not actually need either.
· For example, if your employer offers you adequate cover for health costs, don’t waste money on health insurance at this life stage.
· Similarly, if you don’t have any dependents, then there’s really no need for a term insurance.
· Buying term insurance saves you from getting distracted into buying other insurance products like ULIPs or the so-called traditional products.
· The focus of insurance should be entirely on providing you the highest possible life cover at the lowest possible cost – which only a term insurance provides.
· Other insurance products divert much of your money into high-cost, non-transparent and inflexible investment products that may not suit your future goals.
· As they are more lucrative for insurance companies and their agents, a strong effort is made by them to divert your money into these unnecessary products.
· It is also prudent to split your term cover across two or three insurance providers.
· Buy your term insurance online, directly from the insurers, as the savings will be enormous.
5. Contingency fund
· Besides insurance, everyone needs cash for emergencies.
· This can be any amount that you feel you might realistically need.
· The only rule is that this has to be accessible at any time for meeting those emergencies.
· Therefore, it should be a combination of actual cash and a savings bank balance that can be withdrawn by debit card.
· A sweep-in savings-cum-fixed deposit bank account could also serve this purpose.
6. Equity mutual funds
· Once the above are taken care off, the young beginner can put all the rest in long-term equity mutual funds for growing his savings to meet future goals.
· However, you must not invest your money in a lump sum, but through a monthly Systematic investment plan (SIP).
7. Remember
· The main point about investing in this phase of life is
o Avoidance of unnecessary and unwarranted debt, and
o Learning to match the type of investment to the goals.