First, our young earners realise that they won’t be able to match up to their parent’s lifestyle. They don’t want to lean on their parents’ wealth or live with their parents, and find that they have to make a lifestyle compromise in terms of house, car and other simple luxuries they had taken for granted. The wealth and income of a mature household is definitely likely to be higher than one that has just begun to earn and grow.
Second, our young earners incur steep expenses for rent, travel to work and leisure, recreation and entertainment, clothes and accessories and the like. The joys of earning and being able to spend without having to seek approvals can be liberating and addictive. They find mandatory expenses to run the household quite high, especially if they live in a city and like to be closer to their workplace.
Third, they are unable to hold back from making a shopping list whenever a new situation arises. A friend’s wedding means shopping for new clothes, jewellery and footwear; getting a pet means buying toys, accessories, food and a long list of pet essentials; taking a holiday means shopping for suitable clothes, bags, shoes and such; moving homes means spending on redoing the house, which can include minor repairs and new furniture, decor and appliances. They realise that they find it tough to think beyond consumption as a first step to any new event.
They wonder when they will begin to save. Is there some magical point at which they will suddenly modify their spending habits, they ask. They want to know how they can plan for a child if they don’t have enough savings. To think about a child sends them into a stressful conversation about expenses that will mount and the possibility of the young mother not being able to return to work for some time. How does a young household cope?
First, every young household goes through these problems. It takes a while for career growth to enable higher incomes and consistent surpluses. It can be frightening to view life as being filled with bills to pay and expenses to incur and worry about income being adequate. The focus of young earners should be towards building their career and making sure they have secured their path such that they can progress to higher responsibilities and better earnings. Every household hits its peak earning capability after the initial years of struggle.
Second, the stress about income arises from not being able to decide how a young family will make its lifestyle choices. In the initial years of earning, peer pressures are high. Comparing one’s lifestyle with another; trying to create false impressions; behaving rich beyond one’s means are all phases that people outgrow, hopefully, with time. Every household hits its reality about where to pitch itself and sooner that is learned the better.
Third, saving is a habit inculcated even as one begins to earn an income. To be firm and mature about the limits set by one’s income takes time. Young earners are tempted to stretch their earning abilities in earlier years, only to find that EMIs and credit card dues can be killers. Learning to spend within one’s means and setting aside some money to save, however tough it might be, are precious habits. Even a small percentage is a good start.
Fourth, building assets takes time. But young earners must be careful about the kind of assets they build. Owning a property too early in life, listening to advice about paying the EMI instead of rent, can be harmful to both wealth and career. Buying a property means a large chunk goes towards EMI leaving less for other assets. Concentration of wealth in one chunky asset that one cannot sell in parts, reduces financial flexibility. Career decisions about moving cities becomes tough to make. Build financial assets. House ownership can wait.
Fifth, securing ones financial life from unexpected events is critical for a young household. Without the protection of insurance, the household will be devastated should a tragic event occur. As a rule, until enough assets are built that can generate an income that will replace the income of the household, insurance is the fall back. So is the emergency fund of readily accessible corpus to tide over six to nine months of expenses should the income come under risk. These critical financial goals should not be compromised.
Sixth, financial comfort is more about the mindset than about any rule based or milestone based event. As one settles down to the pattern of one’s income and expense, it is easy to see where the loopholes are. A systematic dissatisfaction with inability to meet expenses must point a young household to rethink its income strategies. They may seriously be earning less than their aspirations. Or, a consistent inability to control expenses might represent an emotional spending issue. Without diagnosis and introspection, personal finance will remain mysterious and stressful.
Seventh, a young household should learn the joys of small corpus for immediate goals so that they remain motivated to save and invest. It is cruel to ask young earners to pay EMIs for 20 years or to save for retirement that is too far away. Instead, saving to enrol in a postgraduate programme; making enough investment gains to take holidays; having enough money to buy a dear one an expensive gift are all joys that enable and encourage the saving and investing habit. It is easier to up the stakes as one enjoys the benefits of building wealth.
Young earners have the great advantage of flexibility. They can change their jobs, cities, friends, lifestyles, habits, and attitudes as they evolve and grow. As one ages one sadly turns inflexible about many of these things; or the world limits the opportunity to take these risks. Don’t arrange your financial lives such that this precious flexibility is held to ransom.
(The author is Chairperson, CIEL)
