Repelling temptations: Finance management for early career professionals
Before the coronavirus pandemic wreaked havoc on the economy, Saket Mishra (name changed), an IT professional who started working in a start up a little less than two years ago did not feel the urgency to start saving diligently. “For a fresher, I was getting a very handsome salary and while it was a huge blessing, it also induced a misplaced sense of complacency. The knowledge that I was no longer accountable to anyone for how I spent money was very empowering. Both these factors led me to believe that it’s okay to splurge as much as I want to and I can always start saving later.”
It was only when Saket’s elder brother lost his job during the lock down that he was forced to reassess his attitude towards money. “It was a very difficult time for the family and seeing the trials and tribulations that my brother went through, I realised that it was high time that I started exercising prudence with my finances.”
For early career professionals, the newly-acquired taste of financial independence can make it tricky to maintain discipline with their finances. Be it the YOLO (You only live once) undercurrent or the desire to ace the game of having the curated ‘Gram’ worthy lifestyle, the demarcation between needs and wants can become blurred and the wishlist can never seem to stop growing. According to the Deloitte 2020 Millennial Survey, 50% of millennials and 37% of Gen Z respondents said they are regularly stressed because of their day-to-day finances.
Time and the magic compounding wait for none
Getting over the urge to procrastinate saving and investing early on can amplify the power of compounding. Parvati Iyer chief investment officer at Femwealth.com, an online investment management platform advises, “With age on your side, it is a great time to get started early and reap the benefits of compounding. The biggest determinant of returns on investments is duration and younger professionals should take full advantage of many years of future income. Getting started and being consistent should be the mantra. It is the regularity in investing when markets go up or down that plays a critical part in ensuring good returns. Compounding then works to make even small amounts of investment can go a long way.”
For Mishra the regret over having spent a fortune on satisfying the persistent itch to appear well-heeled – a staggering amount, he says – has made him realise the importance of not losing sight of the bigger picture in life. “If I would have duly started investing money soon after I became employed instead of spending so much on clubbing and eating out and pampering myself, I would have had enough capital to fund my masters degree without having to think of an education loan.”
Surya Bhatia, principal consultant at Asset Managers says, “It is imperative to develop the habit of saving as soon as you start your career. People often harbor the misconception that starting small will not lead to significant capital accumulation and hence they don’t start saving soon but it is important to remember that only when you imbibe the habit of saving regularly and have enough savings can you start investing. Delaying investments can make you miss out on the power of compounding. The amount is immaterial – even if it is just ₹500 in the beginning, it is good to start saving and not wait for your income to increase.”
Keeping it simple
While financial discipline isn’t something that can be mastered in a day, there is a plethora of ways to choose the path that suits you best and helps you stay on track. Iyer explains, “Setting unrealistic goals when starting out can have a counterproductive effect. A few failed attempts at sticking to a lofty strategy and you would be demotivated enough to stop making any effort. A great strategy for young earners is to pay yourself first i.e when the salary comes in, the first thing they need to do is to take a chunk of money out and invest it right away. This ensures that you don’t spend the money that you don’t have, thus keeping a good saving and investing habit going. You would then live within your means and control your financial future. A little bit of financial learning and avoiding taking debts for purchases will protect your hard earned money.”
Besides adopting simple hacks for becoming habituated to saving, it is also important to choose investment vehicles that are easy to understand and monitor. Bhatia says, “Early career professionals who have just embarked on the path of money management should not try to complicate matters and keep things simple. Mutual fund investments are a great option because they are not difficult to understand and you can actually start saving and investing on a monthly basis through SIPs with a nominal amount. Based on what your targets are, you can have a combination of debt and equity mutual funds in your portfolio. Equity is the way forward for long-term goals and more so for young professionals because they have long lives ahead of them. ”
Iyer corroborates: “Equity as an asset class gives the best returns and works best again as the holding period increases. Additionally risk is also typically reduced over longer periods. Simple calculations will demonstrate that investing in equity mutual funds via a steady stream i.e. a SIP, over a period such as 30 years can give exemplary gains, taking care of goals such as retirement with ease. The investment vehicle can be either active or passive funds.”
• Drafting a budget and keeping a track of your expenses is the first stepping stone towards building a secure financial future. Unless you know where your money is being spent, it is futile to stick to a regular savings and investment routine.
• As an early career professional, if you are looking for a yardstick that helps you determine how much you should save then know that you should target saving 30% of your savings, as per finance gurus.
• Health insurance should be higher on your priority list than the next vacation abroad. A medical emergency can derail your life plans and leave your finances emaciated in the blink of an eye.
This article is part of the HT Friday Finance series published in association with Aditya Birla Sun Life Mutual Fund.