Musings
How to make your money work: A Guide for Youngsters
We keep hearing the word ‘Millennial’, referring to anyone born between 1980 and 1995. We also keep hearing the term “Generation Z”, Zoomers or “Gen Z”, who were born between mid-1990s and early 2010s. The older Gen Zers are already in their mid-20s, have significantly different overall upbringing as compared to the millennials. For instance, the Gen Zers have never seen a world without mobile phones and email. Smart phones, social media, online shopping and many other aspects of our life reshaped by technology in the recent past are among things Gen Z takes it for granted. And rightly so, as these are already part of our everyday life. What’s more important? Many of them have started earning money and are significantly altering the way products and services are sold in this country.
It is estimated that Millennials and Gen Z account for more than 60% of India’s population. Every business wants to cater to this group as they have the purchasing power to the extent no earlier generations did. A healthy flipside to the term ‘purchasing power’ is ‘savings power’, which brings us to the nucleus of our discussion – getting the basics right at a young age when it comes to financial planning. Today’s youngsters are also called the “now generation” as they demand everything as quickly as possible, which could be a dangerous thing when it comes to investing.
So, the discussion of financial planning for youngsters is a very important one.
The newfound financial freedom
A 22-year-old who gets his first salary credit feels he is finally ‘free’ to fulfil his aspirations. For him, this is the first instance of financial freedom, a liberty to go after things and experiences. Many choices have to be made. Where to spend, how much debt is okay, how much to save and so on. However, it must be noted, the term “Financial Freedom” means different things for different people.
Let’s look at a few examples. So, the discussion of financial planning for youngsters is a very important one.
- A fulfilment of a 30 year old saving enough money to pay down-payment for her dream house.
- A 35 year old man who pre-pays his home loan to make his house debt-’free’.
- A confidence of a single mother who can save enough to educate her child.
- The flexibility of a 45 year old to pursue different career options with the safety net of a big enough retirement corpus.
- The relief of a parent whose daughter got a job placement through MBA campus
The list can go on. The key takeaways from these examples are that:
1. There is no one definition of financial freedom as the idea of it differs from person to person and situation to situation.
2. Attaining financial freedom gives us a high sense of fulfilment.
3. And the most important lesson for youngsters is that, life is a long journey and there are more instances of financial freedom to be achieved after the first one.
The “Now Generation” Needs to Look into the Future – Focus on the Savings Rate
Instant gratification and investing do not go together. Investing is a game of patience played over one’s lifetime. Wanting all good things, a trendy car, lavish vacations, latest gadgets, and wanting them ‘right now’ can be a dangerous combination that can hurt your finances very badly. It’s simple to understand that if we spend all the money we make, there is no addition to our wealth. Practicing it is another matter. It is not a crime to want these good things and it is natural to conclude that the person driving a luxury car must be wealthy. However, we should appreciate the perspective that wealth is what you don’t see. As author Morgan Housel succinctly puts it, wealth is financial assets that haven’t been converted to stuff you see. In other words, spending million rupees on a car is the opposite of being a millionaire.
The emphasis is on the savings rate every month, which in most cases are the building blocks for achieving financial freedom as discussed above. We can buy many a stuff with money, but the most valuable thing money can buy is freedom or flexibility, for which keeping money with you is a prerequisite.
When Age is on Your Side, Start Early
This is no secret advice, but not a commonly followed one. If we ask a 22-year-old who just received a Rs.25,000 pay check to invest Rs.1,000 a month for his own retirement, we are likely to find refusal. This is not surprising as retirement planning probably is the last of his priority. However, a simple calculation tells us that it is extremely important for individual to start saving as early as possible. Let’s look into an illustration.
Raj who is currently at age 60 started his SIP of Rs 10,000 when he was 35-year-old, on 1st July, 1999 till 1st June, 2024 his corpus at retirement was Rs 2.63 Crore* and Amount Invested was 30 Lakhs.
On the other hand, had he started the SIP of Rs.10,000 at age 45 (a 10-year delay) and continued till age 60, from 1st July 2009 till 1st June 2024 he is likely to have a corpus of just under Rs. 54.31 lakh* and Amount Invested was 18 Lakhs.
SIP - Systematic Investment Plan
The illustration drives home the point of starting early when it comes to investing. Time is the most important component in wealth creation, besides monthly savings rate and asset allocation.
*Return for the above illustration is calculated using the XIRR return for SIP amount of Rs 10,000 from 1st July, 1999 – 01st June, 2024 (25 Years), invested at the beginning of the month for Benchmark: Nifty 50 TRI – 14.77%. and from 1st July,2009 – 01st June, 2024 (15 Year), invested at the beginning of the month for Benchmark Nifty 50 TRI – 13.65%. The above Illustration is for illustrative purpose only and should not be construed as a promise on minimum returns and safeguard of capital. SIP - Systematic Investment Plan. Past performance may or may not be sustained in future and is not a guarantee of any future returns.
There’s no Get-Rich-Quick Solution – Asset allocation is the key
Younger investors are increasingly resorting to new age apps that have made transacting easier to participate in mutual funds, direct equities and even the riskier crypto assets. To begin with, it’s great that youngsters are willing to take risks of greater magnitudes than that the earlier generation. Remember, over Rs.177 lakh crore (as on March 2024) is parked in time deposits. That’s a lot of money being invested in lower risk traditional FDs. A key question here is, are today’s youngsters aware of the risks involved in say, venturing into cryptos or directly trading in stocks? The spike in interest for direct equities after recent trend of strong performance, also can lead to disappointment if the expectation is that of a repeat of recent performance in future.
The iron rule when it comes long-term wealth creation is that ‘there are no shortcuts to it’. There are very few armors that shield us from the vagaries of market risks, the most important one being “Asset Allocation”. Being present in all asset classes like equity, debt and gold at all points in time, helps us reduce the uncertainties and eliminates the dependence of only one asset class to perform well. The other important aspect is the patience to hold the assets for a long term, a key advantage that younger investors have.
Solutions of the Previous Generation May be Inadequate
What applied to the previous generation is not entirely applicable to us in the present day and age. For instance, it made sense for investors to simply park most of their wealth in fixed deposits 30 years ago. The interest rates were high, and not many capital market products were available. The concept of equity investing was fairly new, low on transparency, unregulated and the risks were high and unknown. We are in 2024 and the world has changed.
Equity investing is made easy through mutual funds that brings along a diversified portfolio, professional management, convenience, systematic investing, transparency, comprehensive regulations, variety of products, solution-based offerings with equities at the core and so on. More importantly, equity investing through mutual funds orients us to think long-term.
When you start investing at a young age, you are starting with a clean slate. How you write your investing story is in your hands. If you think you are not ready to begin the journey, it is ideal to take professional help.
Wish you all a great investing future!
The information contained in this document is for general purposes only and not an investment advice. HDFC Mutual Fund/ HDFC AMC is not indicating or guaranteeing returns on any investments. Readers should seek professional advice before taking any investment related decisions.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
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We keep hearing the word ‘Millennial’, referring to anyone born between 1980 and 1995. We also keep hearing the term “Generation Z”, Zoomers or “Gen Z”, who were born between mid-1990s and early 2010s. The older Gen Zers are already in their mid-20s, have significantly different overall upbringing as compared to the millennials. For instance, the Gen Zers have never seen a world without mobile phones and email. Smart phones, social media, online shopping and many other aspects of our life reshaped by technology in the recent past are among things Gen Z takes it for granted. And rightly so, as these are already part of our everyday life. What’s more important? Many of them have started earning money and are significantly altering the way products and services are sold in this country.
It is estimated that Millennials and Gen Z account for more than 60% of India’s population. Every business wants to cater to this group as they have the purchasing power to the extent no earlier generations did. A healthy flipside to the term ‘purchasing power’ is ‘savings power’, which brings us to the nucleus of our discussion – getting the basics right at a young age when it comes to financial planning. Today’s youngsters are also called the “now generation” as they demand everything as quickly as possible, which could be a dangerous thing when it comes to investing.
So, the discussion of financial planning for youngsters is a very important one.
The newfound financial freedom
A 22-year-old who gets his first salary credit feels he is finally ‘free’ to fulfil his aspirations. For him, this is the first instance of financial freedom, a liberty to go after things and experiences. Many choices have to be made. Where to spend, how much debt is okay, how much to save and so on. However, it must be noted, the term “Financial Freedom” means different things for different people.
Let’s look at a few examples. So, the discussion of financial planning for youngsters is a very important one.
- A fulfilment of a 30 year old saving enough money to pay down-payment for her dream house.
- A 35 year old man who pre-pays his home loan to make his house debt-’free’.
- A confidence of a single mother who can save enough to educate her child.
- The flexibility of a 45 year old to pursue different career options with the safety net of a big enough retirement corpus.
- The relief of a parent whose daughter got a job placement through MBA campus
The list can go on. The key takeaways from these examples are that:
1. There is no one definition of financial freedom as the idea of it differs from person to person and situation to situation.
2. Attaining financial freedom gives us a high sense of fulfilment.
3. And the most important lesson for youngsters is that, life is a long journey and there are more instances of financial freedom to be achieved after the first one.
The “Now Generation” Needs to Look into the Future – Focus on the Savings Rate
Instant gratification and investing do not go together. Investing is a game of patience played over one’s lifetime. Wanting all good things, a trendy car, lavish vacations, latest gadgets, and wanting them ‘right now’ can be a dangerous combination that can hurt your finances very badly. It’s simple to understand that if we spend all the money we make, there is no addition to our wealth. Practicing it is another matter. It is not a crime to want these good things and it is natural to conclude that the person driving a luxury car must be wealthy. However, we should appreciate the perspective that wealth is what you don’t see. As author Morgan Housel succinctly puts it, wealth is financial assets that haven’t been converted to stuff you see. In other words, spending million rupees on a car is the opposite of being a millionaire.
The emphasis is on the savings rate every month, which in most cases are the building blocks for achieving financial freedom as discussed above. We can buy many a stuff with money, but the most valuable thing money can buy is freedom or flexibility, for which keeping money with you is a prerequisite.
When Age is on Your Side, Start Early
This is no secret advice, but not a commonly followed one. If we ask a 22-year-old who just received a Rs.25,000 pay check to invest Rs.1,000 a month for his own retirement, we are likely to find refusal. This is not surprising as retirement planning probably is the last of his priority. However, a simple calculation tells us that it is extremely important for individual to start saving as early as possible. Let’s look into an illustration.
Raj who is currently at age 60 started his SIP of Rs 10,000 when he was 35-year-old, on 1st July, 1999 till 1st June, 2024 his corpus at retirement was Rs 2.63 Crore* and Amount Invested was 30 Lakhs.
On the other hand, had he started the SIP of Rs.10,000 at age 45 (a 10-year delay) and continued till age 60, from 1st July 2009 till 1st June 2024 he is likely to have a corpus of just under Rs. 54.31 lakh* and Amount Invested was 18 Lakhs.
SIP - Systematic Investment Plan
The illustration drives home the point of starting early when it comes to investing. Time is the most important component in wealth creation, besides monthly savings rate and asset allocation.
*Return for the above illustration is calculated using the XIRR return for SIP amount of Rs 10,000 from 1st July, 1999 – 01st June, 2024 (25 Years), invested at the beginning of the month for Benchmark: Nifty 50 TRI – 14.77%. and from 1st July,2009 – 01st June, 2024 (15 Year), invested at the beginning of the month for Benchmark Nifty 50 TRI – 13.65%. The above Illustration is for illustrative purpose only and should not be construed as a promise on minimum returns and safeguard of capital. SIP - Systematic Investment Plan. Past performance may or may not be sustained in future and is not a guarantee of any future returns.
There’s no Get-Rich-Quick Solution – Asset allocation is the key
Younger investors are increasingly resorting to new age apps that have made transacting easier to participate in mutual funds, direct equities and even the riskier crypto assets. To begin with, it’s great that youngsters are willing to take risks of greater magnitudes than that the earlier generation. Remember, over Rs.177 lakh crore (as on March 2024) is parked in time deposits. That’s a lot of money being invested in lower risk traditional FDs. A key question here is, are today’s youngsters aware of the risks involved in say, venturing into cryptos or directly trading in stocks? The spike in interest for direct equities after recent trend of strong performance, also can lead to disappointment if the expectation is that of a repeat of recent performance in future.
The iron rule when it comes long-term wealth creation is that ‘there are no shortcuts to it’. There are very few armors that shield us from the vagaries of market risks, the most important one being “Asset Allocation”. Being present in all asset classes like equity, debt and gold at all points in time, helps us reduce the uncertainties and eliminates the dependence of only one asset class to perform well. The other important aspect is the patience to hold the assets for a long term, a key advantage that younger investors have.
Solutions of the Previous Generation May be Inadequate
What applied to the previous generation is not entirely applicable to us in the present day and age. For instance, it made sense for investors to simply park most of their wealth in fixed deposits 30 years ago. The interest rates were high, and not many capital market products were available. The concept of equity investing was fairly new, low on transparency, unregulated and the risks were high and unknown. We are in 2024 and the world has changed.
Equity investing is made easy through mutual funds that brings along a diversified portfolio, professional management, convenience, systematic investing, transparency, comprehensive regulations, variety of products, solution-based offerings with equities at the core and so on. More importantly, equity investing through mutual funds orients us to think long-term.
When you start investing at a young age, you are starting with a clean slate. How you write your investing story is in your hands. If you think you are not ready to begin the journey, it is ideal to take professional help.
Wish you all a great investing future!
The information contained in this document is for general purposes only and not an investment advice. HDFC Mutual Fund/ HDFC AMC is not indicating or guaranteeing returns on any investments. Readers should seek professional advice before taking any investment related decisions.
