I’m a Millennial. It means I reached adulthood somewhere between the end of 20th century and the dawn of the 21st. I am very comfortable with tablets, apps, online shopping, and of course, social media. The world is my Oyster. I see dreams, move fast, love change. I live my life in the moment. I measure it in experiences. Today, I’m going to talk about the only demon in my otherwise perfect world.
Poor financial planning.
Unlike other mistakes which I’ve turned into anecdotal stories, my financial planning mistakes are sad memories of my early days which I’d pay anything to go back in time and fix. Having lived the better half of my life, I analyzed my financial fiascos, and these are the three broad mistakes I made.
First Mistake: I started too late
When I started my career, they told me to have fun, see the world, be healthy and happy. What is abysmally startling is that absolutely no one told me to invest. I kept checking things off my bucket list through my paychecks, drunk on the joy of spending my own money. I was earning more than I needed so money found a way to leave me every month.
Don’t ever do that. Let your money work for you when the world is sleeping. Invest it. Believe in one of the biggest magics of the world – compounding. The sooner you start investing, the bigger your sum is. Look at this example.
Let’s say you’re 40 and you invest 5K a month for the next 20 years. Your corpus at 60 will be Rs. 50 lakhs. But if you started investing 5K a month from 30, you’d be sitting at Rs. 1.76 crores on retirement. That’s a steep 250% increase, just by starting 10 years early. Now here’s the real magic: if you were smart enough to start at 20, your corpus would be a whopping 6 crores. These figures are computed at an annual 12% return on investment.
Second Mistake: I did not invest smartly or systematically
When the realization hit me, I asked around how to invest. They told me to invest in instruments like FDs, PPF, Gold, house, and of course, LIC Policy. They were lucrative, but 15 years ago. For a person always seeking an unpredictable, adventurous life, my investment portfolio looked like it was from 1950s. Either I was investing just enough to save income tax or I was investing in low-performing instruments, often doing both simultaneously.
Invest in equities through a Systematic Investment Plan (SIP), or Mutual Funds, as they are generally called. They aren’t complicated or cumbersome as you’ve been made to think. They are simple, one-time effort investment instruments that compound over a long time and generate wealth for you. Of course, diversify your investment through stock market (if you understand it, or hire a fund manager), EPF, IPOs, may be even Cryptocurrency and ICOs if you know what you’re doing. But put a good percentage (usually hundred minus your age) of your investment money in equity investments. Unlike old times, you don’t need to understand all of this. Just hire an expert, automate processes, and watch your money grow.
Third Mistake: I did not plan for my life’s big events
When I was getting married, my parents footed the bill for the wedding. I had money just enough for the honeymoon. I bought my first car with only 20% down payment, and paid 7.5 lakhs over five years, for the loan of 5L. I always thought buying things and paying loans for them is the only shot the ‘middle class’ has. I couldn’t have been farther than the truth. I took all these loans because I spent my earned money on credit cards, shopping, buying things I don’t need. Wasting money that could’ve grown for me over the years.
Start defining your investment targets. Your first car, your house, that foreign trip, your kid’s education, or retirement plan. Money being saved for a purpose usually survives any other need or want. Figure out your short term and long term goals and split your investable income across them.
Other things I learnt over time
- Buy life insurance. It makes sure all your liabilities and risks are mitigated, even if things don’t turn out, erm, too well for you.
- Buy health insurance. Medical Emergencies have only one rule, they never announce their arrival. Also, you won’t be young forever.
- Always keep liquidity. As a rule, six months worth of your expenses should be readily available to you as liquid cash. This is of course outside of your investment corpus.
- Don’t use credit cards. Unless you know what you’re doing. A good planner actually earns money (through points and rewards) with his credit card. A bad one infallibly falls into the debt trap.
- Invest in your career capital. Pick up skills that help you do your work better than anyone else around you. Do courses, certifications, trainings or get mentored. It will pay off.
- Build relationships. Create value in your personal and professional. Few things are worth the satisfaction of creating value for others. Not to miss, there’s hardly any point in saving money like a pro to have no one to spend it with.
My financial journey was quite disastrous. The only good that can come out of it is that if you learn from my mistakes and build yourself a better tomorrow. You have my optimism, with my best wishes.
–The author is a very real, 31 year old male from Mumbai, who prefers to be anonymous.
Very well written. This should be in graduation text books so that students get such valuable information right in the beginning of their career
Good advice Pankaj. Your story is similar to many other including me. I hope this article will help others to have their financial planning in early days.