Why young earners shouldn't be forced into making financial commitments
Posted by: Uma Shashikant on Nov 13, 2017, 06.30 AM IST
Young earners are easy targets for unsolicited financial advice. Don't overuse the credit card. Don't borrow. Don't spend. Save for retirement. Start an SIP. Buy some gold. Invest in stocks. Don't rent, buy a house and pay EMI instead. Save before you spend. Earnest and anxious parents persuade the young, worried that they do not know to handle money.
The practical problems of the young earners are something else altogether. They cannot figure how to not run out of money too soon. The earning seems too small for the long list of needs and wants.
There seems to be a lot of money and then there is none. They are not sure why 'settling down' should be a goal. Being financially independent is a new thing they want to deal with it mostly by themselves. Here is my list for parents primarily, so they can get out of the way.
First , allow time and experience for the young earners to use their money. There is no universal set of rules and habits that work for everyone. How someone will deal with money is a very personal choice and people need the time to develop the self-awareness about how and why they make the decisions they do with money.
Some spend to impress; some spend to fight stress; some spend to enjoy the admiration of peers; some spend only if pushed; some don't spend at all. To assume that all youngsters will spend all the money they have without thought, is to generalise too much.
It takes a few months or years of earning and spending to develop the right financial habits. Allow the young to act and deal with the consequences of their action, so they learn from the experiences of spending money. Those lessons last longer than earnest parental advice that controls every action.
Second , the first five years of one’s career is most demanding. Many young people are not even prepared for what their work lives would be like, and whether they are willing to do it for the long-term. Many choices of education and career are not made independently, but under tremendous pressure from parents.
Or, the young have made career choices based on information available to them, and assumptions that seem reasonable. It is only when they begin to work that they understand what it takes, and are then able to evaluate whether they see themselves competent in the chosen job, whether they enjoy what they are doing, and whether there is something else that they can do.
The exposure to the real world and to a larger network of people opens many opportunities that they did not even know existed. The first five to 10 years of work life is the foundation to a steady and growing career that brings stable incomes for a lifetime. Being burdened with an EMI of a house bought soon after the first job, simply ties an albatross to their necks. Don't do it.
Third , flexibility in terms of the job and career is precious to a youngster. Being able to move from one area of work to another, or pick up an assignment in another location, or choose a second career, or take a break to study further, are all choices that young people make to build themselves as professionals.
Some would use the home base and the comfort of the parental home; some others may want to move around like nomads. Persuading the young to get married, buy a house, have a child, or stay on with the parents are all traditional and emotional traps that are restrictive.
The bonds with parents and family are strong enough for the young to stay connected and to return after finding their feet. Do not chain them with emotional blackmail while they seek to build their competencies and stabilise their incomes. Building value into the human asset that is themselves is the primary goal. All other assets can come later.
Fourth , the biggest personal finance challenge for the young earner is managing cash flows. Unexpected need for money is a persistent problem, though it comes interspersed with periods of ample liquidity. They can put money aside from time to time, but they must draw upon it unexpectedly.
A simple bank account that can be swiped into a fixed deposit, and swiped back in when needed, serves their needs quite well. If they can build on that relationship with the bank to get a pre-sanctioned personal loan or overdraft limit, that helps too. A credit card that enables a large spend when needed is welcome.
Their financial life is one of managing liquidity most of the time. The key learnings they must achieve with experience is to make money decisions given that it is a limited resource. They can learn it best when they find the balance between cash and credit, spend and save, accumulate and withdraw, with time.
Help them understand the costs of a credit card or personal loan; engage them in a conversation about borrowings; do not lock their money into illiquid assets.
Fifth , saving is a good habit. If a young earner can set money aside from the start, and build a corpus for a goal like higher education, marriage, housing, or even entrepreneurship, that is excellent. But that kind of long-term orientation towards money is a cultivated habit.
The time someone takes to get there can be different. Give your children the time to see the merits and make the sacrifices needed to develop a steady saving habit. It is cruel to penalise a young earner into saving all earnings for an unknown future event.
If there is a shared future goal, working towards it is worthwhile. Don't make frugality a pre-condition and insist that youngsters make lifestyle compromises because that is the parent's righteous view.
It is fine for young earners to rent their accommodation, eat out instead of cook, travel with friends, and live a lifestyle that fits within their income. Saving habits can come in as they manage their cash flows and make decisions. It is important for income to stabilise, grow and become less risky with each year.
That means they are fitting competent at what they do for a job, and can invest consistently in getting better at it. Personal financial decisions must support this primary goal and not take away from it in the form of housing EMIs, credit card dues, overdue loans or imposed lifestyle expenses that come with including a spouse in the scheme of things. Let them be, please.
(The author is Chairperson, Centre for Investment Education and Learning.)
Disclaimer: The facts and opinions written in this column are those of the author and do not reflect the views of economictimes.com.
This article appeared in Economic Times dated Nov 13, 2017, 06.30 AM IST