As youngsters take their baby steps towards financial freedom, they encounter several challenges. They’re saddled with adult responsibilities and problems. But they often don’t have the experience to tackle those adult challenges.
They start their careers with low incomes, which often creates a mismatch with their lifestyle demands and thus leads to financial problems. Even with high incomes, they may lack the knowledge to save and invest meaningfully towards their future needs.
Here’s a look at some common financial problems the youth face, and some ways to overcome them.
Overcoming Student Debt
Many youngsters start their working lives saddled with student debt. Higher education is oppressively expensive in India, with most families requiring Education Loans to fund it. Such debts can keep growing if EMIs are not paid on time. Irregular repayments dent your Credit Score, which negatively impacts your ability to take more loans in the future.
What to do? First, try and avoid taking fresh loans where repayments are likely to strain your ability to pay existing loans. Try to pay at least the loan interest if you’re unable to pay the complete EMI. Start repaying interest during the moratorium period. Take a long loan tenure to keep the EMIs small and manageable. Once your income increases, shorten the tenure by increasing the EMIs. Borrow only for what is truly essential to you, and fund the rest from your own pocket.
Having A Low Income
How much income would be enough for a young individual? The answer is, it depends on the wants, needs, and habits of the individual. At the start of your career, your finances are stretched the hardest, and it impacts your ability to fulfil primary requirements such as housing and food. Therefore, it’s important to keep your habits, wants and needs in check.
What to do? Youngsters should understand their primary needs and largely allocate their incomes towards them. If their income is not sufficient to fulfil basic needs, they could take on part-time jobs and freelance assignments. Dare we say that they could even cut back on lifestyle choices—include smoking and drinking to that list— the costs of which keep rising exponentially each year. They should also properly budget their monthly expenses and find ways to cut costs and improve savings.
Preparing For Emergencies
It’s important for you to fight financial, health, and life’s uncertainties. No matter how young and healthy you are, life could have unpleasant surprises in store for you. You don’t want your meagre savings to be blown away by an unexpected hospitalisation.
What to do? Have an emergency fund to help you go through a period where you could be without an income. For starters, you could aim to have three to six months of your income saved in a bank deposit for emergencies. You should start estimating your insurance needs the moment you become financially independent. A life cover should be taken if you have financial dependents. Health Insurance should be taken for everyone in your family, to protect your savings against hospitalisations. The other advantage of buying insurance young is that your premiums are going to be the lowest they’ll ever be.
Differentiating Between Saving & Investing
Youngsters often confuse saving with investing. Maintaining the right balance between the two is essential for wealth creation. The money that you set aside from your earnings after meeting your fixed and variable expenses are your savings. If you put your savings in financial instruments that can grow your money, it’s called investing. For youngsters, it’s often a challenge to save meaningfully, which means that investing is an even bigger challenge. Often, investing is not considered an option at all.
What to do? Always find a way to save and invest. No matter what your income level, earmark 10 to 20% for the future. No matter how ridiculously small the absolute value of that 10% may be, persist. If you start with a monthly Mutual Fund SIP of just Rs. 1000, keep increasing this contribution annually by 10%. If you pick an equity Mutual Fund that provides a Compounded Annual Growth Rate (CAGR) of 12%, you will create a corpus of Rs. 7.77 lakhs in 15 years, or Rs. 75 lakhs in 30 years. That’s the power of compounding returns working on your small, monthly investments.
Differentiating Between Wants & Needs
Youngsters are easily confused between wants and needs. Essentially, wants are needs backed by purchasing power. Individuals who confuse the two often spend heavily on wants such as entertainment, holidays, purchasing high-value electronic gadgets, etc., while ignoring needs like saving for future, buying a home, getting insurance cover, etc.
What to do? Lifestyle choices often cause great dents on your financial health. When you’re young, you need to be careful especially with how you spend your limited income. Focus on identifying and fulfilling basic needs first. You don’t need to be harsh on yourself and deny yourself the pleasures of youth. You only need to seek your pleasures while exercising financial control. As you grow older and your income level rises, you can afford to be more lenient about your wants.
Lastly, remember not to compare yourself with your peers who may be more financially blessed than you. This could put you under undue stress. Set your own goals and seek your joy in achieving them.
(The writer is CEO, BankBazaar.com)
I use my credit card instead of Debit card just because I believe it will be positive impact on my credit score for future Housing loan etc. Am I right ?
Using your Credit Card can help with your Credit Score if you manage your payments well. However, if you don’t pay your bill on time, default on payments or exceed your credit limit, it could negatively affect your score. But if you’re prompt on your repayments and use your card wisely it will help you build a good Credit Score. You can check your Credit Score for free by clicking here.