Key takeaways
- It is important to learn from an elder’s experiences to avoid financial mistakes in life.
- An early start to investing can reap good returns in the long term.
- Besides investing, one needs to save efficiently, budget properly and understand how taxes work.
------------
It is often said that experience is the best teacher, but is it possible to have all the required exposure in a short period? Is it necessary to learn everything the hard way? One way is to learn from other’s experiences. As an elder brother/sister, we can share our experiences with the younger lot to save them from common financial pitfalls. On this auspicious day of Rakshabandhan here are five financial tips to pass on to your younger siblings.
1) Start investing early
In the financial race, you will not be disqualified for starting early. Rather, investing at a young age can reap good returns. For starters, one’s risk appetite is higher at a younger age as responsibilities are on the lower side. Losing a small amount in your 20s may not make a dent in your long term financial future as against a loss in your 40s. A small amount can turn into a substantial sum if left invested for a long time. The power of compounding takes over when you remain invested for a sufficient time as you start earning interest on the principal amount as well as the accumulated interest.
It is not easy to understand investment instruments at an early age which often leads to procrastination or investing in low-return instruments. Investing through mutual funds is an easy and transparent way to access the equity or debt markets.
Investments can be made in both debt and equity markets through mutual funds, with debt markets being relatively stable. However, both markets face intermittent volatility. To guard against market turbulence, it is advisable to invest through Systematic Investment Plans. A SIP is a regular investment of a pre-determined amount at a fixed frequency, typically monthly, in a scheme, as against a lumpsum investment, which is one time. Investing through a SIP helps fight market volatility as investors get more units of the scheme when the market is down. This results in lower average price and higher returns when the market inches up.
2) Build an emergency fund
At a young age, people often have to relocate to a different city for education or work. The support system could be lacking in a new city and having an emergency fund keeps you in good stead. Set aside an amount which can be used in a variety of situations like medical emergencies or to book tickets when you are short of funds. The fund should be replenished and a minimum amount should be maintained at all times. It also helps to cover unbudgeted expenses like car repairs or home repairs.
3) Inculcate a habit of saving
Saving regularly requires an active change in lifestyle. It is easier to adjust your lifestyle at a young age when essential requirements are low. As a rule of thumb, one should try to save at least 20 percent of the monthly salary in the initial phase. Life is unpredictable but very few people realise it when they are young. When you have substantial savings, it is easier to face the uncertainties of life such as loss of a job or a costly hospitalisation. A habit of saving regularly helps considerably in achieving financial freedom at an early age.
4) Prepare a budget and follow it
There are many important activities every month that require money to be fulfilled. It may be a long pending travel plan or a necessary purchase. In addition to essential monthly expenditures, you have to save, invest and sometimes may even have to replenish the emergency fund. To allocate an ample amount of money under every head, a deft balancing of finances is required, which requires proper budgeting of income and expenses. Generally, people have just one source of income when they are young, so only budgeting of expenditure is required. The responsibilities do not end with preparing a budget, one also has to follow it duly for it to be effective.
5) Get a grip on taxes
With the government focusing on tax compliance, it is very important to understand how income tax works. When you start earning, with knowledge of taxes, it is easier to calculate the final payout. This helps in knowing if the salary is enough to meet one’s financial obligations and planning accordingly. The different types of deductions and tax exemptions offered by the government should be understood to make investing an efficient exercise. Having a sound knowledge of the taxation system also saves you from bad tax advice and misinformation.
The phrase ‘it is easier said than done’ fits perfectly when it comes to financial planning. Moreover, the propensity to consume is higher when you are young. People realize at a very late stage in life the virtues of starting early. Being the elder sibling, it is important to teach your siblings to spend with caution and focus on starting early. :)
