Young earners should not be forced to save for the long term. Here's why
Posted by: Uma Shashikant on Dec 31, 2018, 06.30 AM IST
By Uma Shashikant
We were standing outside the electronic goods shop. It was 1990. The husband wanted to buy a VCR. I wanted to open a PPF account. We had all of Rs 10,000, saved over the entire year. It was the end of the year and every shop had discount sales on; and it was also the time to report to our employers the tax saving instruments we had bought.
When I told him we should begin long-term savings and use the tax concessions to build some
investments, he agreed. But not this year, he said. We were living on the Brooke Bond campus, 35km away from (at that time) Secunderabad. Ghatkesar, where the factory was located, was a sleepy village. Except for trekking to the nearby hills, there was no other form of entertainment. But it had a tiny video parlour that rented out popular films. The husband wanted the VCR to watch films over the weekends.
While it is nice to ask young earners to save for retirement, implemention is cruel. Early days of life are for the joys that money can bring. One does not learn to make money decisions without experiencing the joys of buying what one wishes, or without the regret one feels when money runs out. There is almost never enough.
We stricture the young for spending, warn them about dire consequences, tie them down to a house in the suburbs and kill their joys with the home loan EMI. We think that if they do not have a SIP running, they are not disciplined with money; if they don’t buy insurance they are wasting their income on taxes; and if they don’t have a PPF account, they will live in penury in retirement.
Retirement is not on the mind of a 30-year old. It need not be. To save is to provide for an unknown event in the future. To the young mind filled with confidence, rising out of their newfound ability to earn an income, it is tough to see a world of fear and anxiety. Not having an income in retirement is a goal too far away into the future, to inspire action today. And maybe it won’t matter much.
If we had saved that Rs 10,000 in 1990, and if that money had been invested in a high return earning product like equity, and made a 16% compounded return per annum, it would have grown to about Rs 8.5 lakh in 2020, when we are ready to retire.
Our retirement is secure today, not because we put aside Rs 10,000 annually since 1990; nor because we had a PF deduction. It is secure because we focussed on enhancing our
earnings to the best of our professional capabilities. We lived and worked where our jobs took us, were willing to take up challenges, and grasped opportunities to do new things as we went along. Our income has grown at a decent rate over the years, which has been a much more important contributor to our wellbeing and retirement.
The second primary contributor to the retirement corpus is the fact that it is an all-equity portfolio, save for the money that lies in the PF and has been
sadly subject to traditional thinking that retirement money should be safe and earn an annual interest income. We would be twice as rich in retirement, if that money had been invested in equity as it should be.
Let’s return to the young earners’ dilemma. The most important financial goal when one begins to earn money is management of liquidity. There is always an unexpected expense, and there isn’t enough money. The first five years of employment should be spent in ensuring that money is set aside when in surplus, and unexpected needs are well funded. This may entail borrowing, which is an important lesson to master.
Keeping money in a bank fixed deposit, drawing an OD on it when there is a need, and repaying it with future income, is a precious lesson. Without this routine, a young investor will not be able to assess his or her saving capability. When a comfortable position of a regular surplus in the bank arises, the young earner is ready to save and invest.
Early investments should be for immediate goals that are visible and offer motivation. It could be to take the much-coveted holiday; or enrol in the dream postgraduate program; or marry a loved one in style; or fund a holiday for parents. These goals that feed on the new earning capability, add to the joy and pride of saving and investing.
There is no denying the importance of the saving habit. Even if it is a mere 10% of the salary, one must begin to save from the first salary into the bank account. My point is that such savings should be invested for immediate access and for short-term goals, and not kept aside for a distant goal like retirement, imposing needless restrictions on accessing it. Early savings are built, used and rebuilt. It is the learning process.
Our retirement corpus today includes what we saved in the early years. But a large portion of it is made up of what we saved in our 40s and and 50s. The later savings were larger due to the higher income and lower spending. There is no new car or property to buy when one is in one’s 50s and enjoying the work one is doing. If our saving ratio in the 20s was 10%, it is now nudging 80%.
Austerity is all good and wise but allow it to arrive when it should as one ages. In the name of early saving and fear mongering, don’t tie your youth in decisions that take away the joys of consistent professional growth that translates into steadily growing income. Take those chances with work, study and career choices, rolling over the little savings you have put aside.
As for that argument outside the shop, the husband won it and we brought the VCR home to the many delights of binge watching on Sundays. The retirement corpus did not suffer from that choice.