The primary pain point of the millennials with the education and corporate training set up in India is how it fails to enable them to manage their money or personal finances better. They rue the lack of awareness on lifestyle and investing errors generally made and how they can build a COVID relevant investment portfolio statement.
Saving money is more important than earning money, especially given the economic gloominess over the next 2-3 years.
The emphasis on effective money management is more important than ever now. The sharply shrinking economy (~25% GDP de-growth in the first quarter), regular job furloughs, and losses along with the mundane drudgery of corporate jobs make effective management of personal finances a top priority.
Effective money management is not about earning more but saving smartly and avoiding investing and lifestyle errors. With a major career trend, this decade being millennials looking to take multiple sabbaticals to pursue their passion, effective management of personal finances will become more important than ever.
After all, the more money you have in the bank, the better you will sleep at night. The power of compounding works miraculously when money is saved in the right way over a long duration of time (at-least 7 years).
Most millennials make the same errors
It is quite remarkable how most millennials make the same set of lifestyle and investing errors which deeply dents their ability to build a strong financial nest. While this column is directed at millennials, it should be noted that our elders also made a version of the following mistakes.
With the incessant lure of materialistic consumerism, living on credit card debt seems like a proposition out of heaven with 2 per cent interest every month seems a reasonable amount to pay. However, this habit is nearly criminal as 24 per cent interest (every year) is usurping money (your fixed deposit in the bank earns 4 per cent - 5.5 per cent after taxes), and living on borrowed money initiates a vicious circle which is very difficult to get out of.
A corollary of this principle is how millennial consumers first spend and later save the rest rather than the other way around. Besides, there is a sense of false complacency in every millennial, that things cannot go wrong (a medical emergency, a job furlough, a family emergency) with them and they avoid maintaining an emergency fund.
The biggest risk concerning personal finance is to treat it as a vehicle to prove your intellectual coolness. Any attempt to prove someone the next Warren Buffett / Charlie Munger will only lead to the deep erosion of capital. This implies investing in instruments he or she doesn’t understand (e.g., financial derivatives) or illegal (e.g., cryptocurrency) or investing in penny stocks. Anyone who proclaims on having the next sensational stock tip or has made a killing in the stock market should stay away, as they are just fibbing or hiding the incredible losses made on other penny stocks.
With the COVID-induced lockdown, the risk of excessive gambling of money on the stock markets has been steadily increasing as the number of Demat accounts has risen four-fold during this period.
Pursuing capital safety and realistic returns are the best principles to apply in the current context
As careers are expected to be more non-linear and under greater risk this upcoming decade, it is only necessary for millennials to pursue a greater degree of safety with financial instruments. Also, past theories of equity contributions being around 100 minus a person’s age don’t hold any longer as the inherent volatility in equity markets has increased along with the definition of the waiting period for returns to materialise, from 5 - 7 years earlier to 10-14 years in the current context.
As a result, millennials should allocate greater than 50 per cent of its portfolio in debt instruments. The rest can be allocated to equity (large-cap preferably and the American stock markets for the more adventurous), a bit of gold, and a corpus of 6-9 months’ expenses in an emergency fund. However, the most important part is to save a fixed portion of salary (at-least 50 per cent) every month and then live around the remaining amounts. Avoid credit card debt at all costs!
In conclusion, effective management of personal finances is a huge driver of career success. The more you have in the bank, the better your outlook on life will be and you can take on more career risks or pursue your dreams.
The author is the Director - PricewaterhouseCoopers (PwC)