An expert’s advice to young people for achieving financial independence
Globally, young people take much less interest in their personal finance compared to older people.
There are country specific reasons as to why young people tend to save or invest less. For example, in the Western economies like US, UK etc. young people have to carry the burden of student loan for quite some time. Parents in India usually do not talk about money matters with their children, until they grow up to be adults. As a result, there seems to be a lack of interest in personal finance and investment awareness among young people.
Why people start saving from an early age?
In India, young people have an advantage because many youngsters continue to live with parents even after they start working. They may not have to pay for rent, utilities etc. which their Western counterparts have to. Though your income is lower when you are younger, you do not have responsibilities which may come later in life e.g. supporting your family, paying home loan EMIs, supporting retired parents etc.Good savings habit inculcates responsible spending habits. Many young people fund their lifestyle expenses through credit card debt. Credit card debt can be a vicious cycle. Good savings habit will help you remain debt free.
Though young people are mostly focused on their immediate priorities, you should also be aware of long term priorities like retirement planning etc. Success in financial goals is as much about mental discipline as it is about making smart financial decisions. Aspirations are also changing in the millennial generation. Some may want to retire early to pursue different aspirations like organic farming, wildlife photography, NGO etc. It is imperative that you start saving from an early age to have financial security and follow your aspirations. The earlier you start saving and investing, the more wealth you will be able to create through the power of compounding. The money when invested early may grow exponentially over time. Time is the essential factor in wealth creation.
Saving is not enough – you need to invest
Inflation erodes the purchasing power of money in the long term. The value of Rs 1 lakh saving today will be lower in terms of purchasing power 5 years from now and will progressively decline over time. Unless your money grows at a rate faster than inflation, you will see net worth erosion instead of growth.
In order to create wealth your money needs to grow at a faster rate than inflation. Simply saving is not enough; you can put it to productive use by investing it to create wealth. Wealth creation through investments usually involves some amount of risk taking because risk free investments on a post-tax basis usually fail to beat inflation.
How can young people start investing early?
Many young people think that they need a lot of money to invest – it is a misconception. Systematic Investment Plan (SIP) is a mutual fund investment plan where investors can invest small amounts in mutual funds from their regular savings at fixed intervals. Through a bank ECS mandate, an amount chosen by you automatically gets debited from your bank account every month (or any other interval specified by you) and invested in a mutual fund scheme selected by you. You can start your SIP with Rs. 1,000 monthly investments and increase your investments over time as your income and savings grow.
Benefits of SIP
Disciplined investing: Multiple studies have shown that discipline is of utmost importance in achieving your financial goals and create wealth. By investing fixed amounts from you regular savings through SIP, you need not worry about whether market is high or low.
Power of compounding: Compounding is essentially returns earned on returns. It creates a virtuous cycle of wealth creation over long investment periods. With SIPs you can start early and achieve your goals with relatively less savings.
Rupee Cost Averaging: By investing at a regular frequency, e.g. monthly, one is investing both at the high and the low prices. While many investors may be scared to invest in volatile markets, SIPs work well in such conditions by averaging the cost of the investment and enhancing your returns in the long term.
In this article, we discussed why young investors should start saving and investing early in their lives. Mutual fund SIPs are ideal investment options for young people to begin their investment journey early in life. In fact, you can start investing in SIPs from your pocket money as a student also. Consult with your financial advisor to know more about SIP and start investing.