Why youngsters should be allowed to enjoy their earnings
Posted by: Uma Shashikant on Apr 10, 2017, 06.30 AM IST
By Uma Shashikant
In the personal finance world, newly employed youngsters are the easy victims. They will be persuaded to save more, spend less, desist from borrowing, buy a house quickly, buy insurance to save taxes and even before they have earned their first salary, be warned about the consequences of not planning early enough for retirement. Let's go through these homilies to seek an alternative view.
First, young earners should be allowed to enjoy the fruits of their earnings. To be able to earn money for one's own skills and knowledge is a milestone that a youngster should celebrate. The burdens and commitments of life ahead and the expectations of the immediate and extended families are all realities that one learns to deal with.
However, the joy of being an earner should not be lost to pessimistic views of the world. Most youngsters will not earn enough to meet the various aspirations about how they should live their lives. They will learn to set their priorities soon enough, as money is but a limited commodity.
Before the multiple demands on the income take over, a young person should be able to define little things that they would like to do routinely with their income and define them well for what it means to them. It could be a meal with a dear one, or a road trip to a favourite lake, an offering to charity, or a bouquet of flowers for the doting mother.
The defining of mandatory spends is the cornerstone of sensible saving and investing. It is the non-negotiable spending that takes up a lot of the young earner's money. By the time the rent and the bills are paid and the monthly groceries are bought, there is too little to go around. When one earmarks expenses, even if it is a small indulgence, one pauses to think about what is it that really matters to their happiness.
It is then easier to see how living with roommates can save rent, or how taking the bus home in the evening is not difficult. If one begins the earning phase with a long list of mandatory expenses to incur, there is too little to save. It is nice to enjoy the earnings when it is spent on what really matters. Every young earner should be able to honestly ask and answer that question.
Second, there is no merit in overdoing something even if it is good. It is not uncommon to hear the advice that one should buy a house soon, especially since bank loans are easy to get; EMI is a compulsory saving, and repayments are eligible for tax breaks. The problem with this suggestion is that it is too heavy a burden to impose on young earners, who still do not know if their job will require them to move to a new city.
It is also not known if they would want to pursue another line of specialised education to move ahead in their profession. Compelling them to buy a house so that they can have an asset, even if that asset may not come of use in their lives in the immediate future is a financial burden that young earners can do without. The same holds true for compulsions to sign up for a large insurance premium, which one struggles to pay.
The most common personal finance problem that youngsters will face is lack of liquidity and the imbalances in their cash flow when they have to meet unexpected demands for money from a limited income. By pre-empting a good portion of the income into “beneficial” payments like EMI and insurance premium, the idea is that if the money is not available to spend, it gets saved.
We thus have young homeowners with large credit card spends to meet routine expenses. Young earners whose income is pre-empted by EMIs and premium have too little left for unexpected expenses.
Young earners should know that every decision they make with their money is theirs alone, and therefore reflects who they are and how they choose. They should know that there is no backup option once they are financially independent. The consequences of their money decisions should, therefore, be theirs alone to deal with.
Preemptive saving is a good idea if the money thus saved in a deposit or mutual fund can be used during times of need. Money locked into the house or a lapsed policy are tough and costly to release.
Third, not all of us can go through life without borrowing and there is little merit in dissing credit. Many young earners begin their financial lives with an educational loan to repay, and they default on this loan with adverse consequences for themselves. In these days of a closely tracked credit score, it makes little sense to default on a loan. What might prove to be useful during times of need, is a good credit record.
Building a record of regular repayment of personal loans, auto loans, credit cards and such short duration lines of credit build up a credit history. This would come of immense use when one applies for a home loan later, or tries to mobilise money for an unexpected need. Having a steady relationship with a bank, which has its own internal records of the history of the depositor's income, savings, deposits, and loan repayments is helpful.
Fourth, the financial life of a young earner will change significantly over time. From a point where unexpected cash needs hit them too often, they would have moved to a steady level of surplus every month. It is then that they are ready for investing in long-term assets.
Equity, SIPs, PPF and such investment options where they should ideally invest for the long-term and not look at or draw from, can happen when a steady surplus is in the bank account before the next salary hits it. There is no point investing in equity if one needs the money in three months' time.
Many hold a poor view of the young earner as someone who will buy too many things, overspend on the credit card, and live a reckless life on the edge. For a few who remain clueless, there are millions who want to figure out what is important to them, spend carefully on what matters, borrow when they must and save when they are ready for it. It is this majority that needs protection from forced financial discipline of the conservative era.
(The author is Chairperson, Centre for Investment Education and Learning.) This article appeared in Economic Times dated Apr 10, 2017, 06.30 AM IST