If you ask a child what he/ she would like to be when they grow up, you must be prepared to deal with future doctors, actors, soldiers or astronauts. But none will ever say, “I want to be a successful financial planner who is able to streamline own finances to secure one’s personal financial future”. Well, it’s pretty unlikely that you will bump into a child who is so committed to the cause of saving and investing from a very early age. Yet, in the financial realm, the fact remains the sooner you start, the better you reap.
It is imperative for kids to learn the importance of saving money right from the very beginning and by the time they come of age, they should be able to study, interpret, seek guidance and take independent financial decisions. But most young kids are shy of taking financial decisions, don’t know where to invest and therefore skip the idea completely, are confused on what financial planning really entails, lose focus and finally end up goofing with their hard earned money. By the time they realise what they should have done in early adulthood, an important decade of their investing life is lost. Look no further. We have made a comprehensive list of ways by which the youth today can achieve financial freedom. Read on.
Step 1: Budgeting & Saving
As a maiden step, draw a budget. Budgeting is the simple exercise wherein you reconcile your income against your expenses. Most of the time, we believe, we have budgeted our expenses by calculating them in our head. But when you jot down all your monthly expenses and income on a paper, you realise the truth. Once you have undertaken this exercise, month on month for atleast a quarter, you will be able to accurately measure the amount of money you need to spend in a month.
Experts have pegged 20% of income as a comfortable level to begin savings with. From the moment you receive your salary, keep aside 20% of it in a bank account every month. Begin with making a simple Fixed Deposit from this corpus. This will help you in inculcating a lifelong habit of saving.
Step 2: Lay down your financial goals
Before you invest to achieve your financial goals, you must be able to understand and write them down. There can be a multitude of reasons to save money. For example, buying a house in 10 years or driving own car in 5 years or may be, buying the new mobile phone in 1 year. Are you saving enough to meet any of these goals? Will saving alone help you meet your goal or should you rather invest to make your money grow than sit idle in the account? Saving is easier, but investing can be tricky. If you haven’t done your research on the different avenues to invest in, it can jeopardise your financial future and lead to losses.
You must pen down your goals clearly. Divide your goals under three heads – short term, medium term and long-term. Estimate the amount of money you will need to meet these goals. Factor in an average rate of inflation. Know that your earning capacity, future income, number of dependants, marriage, children, personal priorities, unpredictable expenses, loans etc are some areas that can cause a dent in your plans. Plan accordingly and be prepared to make adjustments.
An important note: You may not be thinking of planning for retirement now but you must start thinking about it, even though with a small amount, from the time you start earning.
Step 3: Invest in right instruments
Some tips in the financial domain are ageless, just like gold. They are passed down from parents to children just like every other lesson in life. They are the most valuable lessons that parents can hand down to their kin. Parents not only pass on their rich and bitter experiences, but sometimes their financial fears too. But every child is an individual and every individual has an independent risk appetite.
There are several vehicles of investment. They are broadly categorised into debt & equity. To achieve short term goals, experts advise to invest in debt instruments while to achieve long term goals one must opt for investments in equity. Debt instruments such as fixed deposit are less risky and your capital is secure. Historically equity investments, though risky, prove to have given the best returns.
Taking a leaf out of Warren Buffet’s life, “read thoroughly and research well before you invest”. There are short term debt funds, medium term balanced funds and long term equity linked schemes to choose from. Alternatively, keep money in PPF, EPF and Pension plans etc to save for retirement.
Another important note: Applying for a credit card is not equivalent to making an investment in a savings vehicle.
Step 4: Tax Savings, Insurance
Most youngsters are not even aware of what tax is, how it impacts their income. Often salaries are low in the beginning and they may not even feel the pinch. Yet, certain avenues of investment can provide them with financial relief, growth and tax benefits too. Such as a term insurance policy, PPF deposits, health insurance etc. Thus it is important to brush up on your tax knowledge, know which bracket you fall in and plan to save the maximum amount that you are eligible for.
When you are young, you do not feel the need for an insurance policy. It not only helps in saving tax but also comes to your aid when you need a large amount of cash for such as an accidental or medical emergency. It is always better to be prepared than be sorry. Get in touch with your insurance consultant today and learn more about the types of insurance that you must take.
A Few Final Words
At a time when a young child is struggling to understand the physiological changes, injecting economic sense into him or her can be a challenge. Youngsters today are urban, well connected socially, not shy of voicing their opinion, deal with peer pressure & high competition etc. With the growing gamut of objects that a young child would desire, they are constantly trying to keep up with expenses. And sometimes they are pushed to the brink for money. Juvenile delinquency is a real problem. Financial planning can help eliminate all those challenges and build financial confidence in our youth. It is barely a stepping stone in creating visionary & confident leaders of tomorrow.
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