Five simple tips to help the youth kick-start their financial education

Financial security and the value of hard-earned money are ingrained in the average Indian mind since childhood. We learn to save money with our piggy-banks much before we learn to spend money on the things we want. We grow up listening to our parent’s advice about investing and saving money. Yet an increasing number of young adults in India are struggling to manage their finances.

Recently, a personal loan application from a young working professional, who earns more than Rs 50,000 a month, was rejected. Despite being employed at a leading global consulting firm, and living in his own house, he had virtually no savings – hardly Rs 5,000 a month. Therefore, financial institutions weren’t convinced that he could afford the loan. What’s more, getting his loan application rejected further reduced his chances of getting a loan in future.

It’s surprising how many young adults have monthly savings below Rs 5,000, despite a steady job and reasonable income. My social circles have also echoed the same struggle – when I meet friends, peers, colleagues, and family members who are young adults themselves or have children who are young adults, I hear similar stories about money mismanagement, savings, and responsible borrowing.

At the heart of this struggle for most young adults is the inability to understand or manage finances due to the lack of proper financial education. Unlike the west, where financial education begins at a high school-level and is structured, financial education in India is imparted mostly from a parent to a child and generally begins once they start working. Till then most young adults tend to pass on all their personal finance responsibilities and decisions to their parents.

At the same time, today’s youth have access to a variety of consumption avenues such as online shopping, entertainment, and leisure activities, fine dining and alcohol, and recreational travel than ever before. As a result, most of them save and invest only small proportions of their income, have problems managing credit card payments and student debt, and often look up to their parents for temporary bailouts.

This paycheck-to-paycheck, no savings, casual-credit-card-use lifestyle can really damage a person’s credit worthiness. This means that one could find it difficult to get a home loan, an education loan or a loan for a medical emergency – things that can really impact their lives at crucial junctures.

Here I’ve noted down five tips to help manage personal finance better:

• Find out the leaks in your ship: Start tracking all the small purchases you make on a daily basis – the random coffee, the Uber ride back home, the short weekend getaway; all these small expenses cost money. Keep a tab on your expenditure on entertainment, lifestyle, and leisure activities to know where to cut down.
• Budget all your recreational expenses: Know how much you need to budget for recreational and leisure expenses such as going for a trip or paying for your guitar lesson. Creating a budget will make it easier for you to prioritise your needs and allocate funds to your hobbies, interests, and passions while also helping save money.
• Create a basic investment portfolio: Start investing simply by allocating some portion of your salary in a recurring deposit that offers higher rate of interest than a simple savings bank account. Once you have learnt to commit some savings to a RD, you can move on to other financial products such as low-risk mutual funds and corporate bonds that are low risk and give better returns than FD.
• Build a credit profile: If you plan to buy a car, home, or want an education loan in the future, build a solid credit history first. You can do this by taking a small personal loan or a credit card. When you make timely payments on your loan EMIs or credit card purchases, you build a positive credit history and banks become more likely to lend to you at lower interest rates in future.
• Build your financial IQ: Invest time in increasing your financial IQ and becoming wiser about how to manage your finances. While you can get fundamental knowledge by reading books and online resources, speak with experienced investors and financial professionals within your social circle to understand how they make financial decisions and learn from their advice. Increasing your financial knowledge will help you make well-informed financial decisions from an early age and avoid rookie mistakes later on in life when you have more challenging decisions to take.

Building healthy financial habits takes a lot of practice and perseverance. In time, one will start seeing the results they want and have healthy spending and savings habits.