Noted Irish playwright and philosopher George Bernard Shaw opined, “Youth is wasted on the young.”
What he possibly meant was that many young people have everything going for them physically; they’re in the best health they will ever be in, and their minds are sharp and clear.
However, they lack patience, understanding, and wisdom which results in so much wasted efforts.
The energy that can be directed towards building a solid thought process and action plan for the future is spent on short-lived pleasures.
Shaw’s words are especially applicable to those young adults who are starting a career and wondering if they should start saving and investing for their future or spend the next few years living life kingsize.
You see, I am not old enough to complain about the younger generation. And that’s why I believe youth is not always wasted on the young if the young can realize that someday their bodies and time would fail them and that they would appreciate what they have now.
So in this post, I have put down a 10-point action plan – a manifesto – for the new, young earner to encourage him/her to begin to save and invest starting as early as possible, and take some simple yet effective steps to kick-start his/her financial life.
If you are young, time is one of your greatest allies in wealth accumulation and it is the one resource you will never get more of in the future.
After starting out to earn your own living, if you waste the early years saving and investing nothing, they are forever lost.
So that you do not lose out on the precious time you have on your side to start making your money work for you, here is the action plan that you must (may) follow.
You are free to modify this action plan to suit your needs. It’s just that this has worked very well for me for the past many years, and thus I am happy to share it with you.
Read carefully what you see below. Try to remember it. Modify it if you may to suit your needs.
This is what you must tell yourself often when it comes to managing your hard-earned money.
This is your money manifesto.
1. I will pay myself first
I realize that this is an excellent habit to develop early.
I have come to know that people who are best set for a comfortable financial future are not necessarily the ones who had the best careers but the ones who had good living and saving habits.
The general equation of saving money is = Income – Spending = Saving
I will follow a more sensible equation = Income – Saving = Spending
In other words, I will first allocate my savings and only then spend what is left (of course, after budgeting for necessary expenses like food, housing, and utilities).
In terms of priority, I will save for my own retirement before saving money for my children’s higher education. They can get education loans. I won’t get retirement loans!
In terms of how much should I save, I will start with saving at least 10% of my monthly net take-home income, and gradually increase it to 30% by the end of the first year. The ultimate target will be to reach 50% of net income.
2. I will always keep an emergency fund
This fund may be 6-8 times my monthly household expense. So, if I spend Rs 30,000 every month to keep my house running, I must set aside around Rs 200,000 as emergency fund – money that will lie in a liquid fund or short-term deposits that I can withdraw in case an emergency strikes.
Also, I will not touch this emergency fund to purchase a gadget, pay down-payment for a car, or fund a holiday.
This is sacred money, and I will use it only in emergencies.
3. I will buy health insurance
As I see around me, medical innovations are making people live longer. However, costs of keeping healthy are also on a rise. A doctor’s fee has risen to match a lawyer’s fee!
I must thus buy medical insurance – for myself and my family (spouse, children, and parents). Even if my employer provides a medical cover for me and my family, I must still buy an independent policy to cover myself in case I quit this job in the future.
The reason I must buy a cover as soon as possible is that the more I delay, the more I will have to pay as premium.
4. I will buy term insurance
No ULIP, no endowment, but I will buy only a term insurance plan.
I know my friends have not bought term insurance because you don’t get any money back if you survive the insurance period, but I also realize that this is the purest and cheapest form of insurance.
For instance, as I have seen in the case of a few friends, I can buy Rs 50 lac cover for a premium of less than Rs 10,000 per year. This premium comes to just around Rs 800 per month, a sum I may easily splurge on frivolous things.
I must see term insurance as a “cash flow” insurance – it will insure the cash flows my family would need to survive, whether I am alive or not.
5. Given the huge costs involved, I will not delay saving and investing
Simple calculations show me that a 23-year old who puts away Rs 6,000 a year for 10 years at an annual return of 8%, will have around Rs 87,000.
If after those 10 years, he stops contributing and does nothing else till he is 60 years old, the portfolio will have grown to around Rs 694,000.
The person who waits until he is 33 to begin investing will need to invest Rs 7,950 for 27 years (till he reaches 60 years of age) in order to have around Rs 694,000.
In total, the 23-year old had invested Rs 60,000 out of pocket (to reach Rs 694,000 at age 60) versus Rs 215,000 for the 33-year old.
As these calculations show me, there are great costs of starting late on the saving and investing path.
So I must start early. As early as possible!
6. I will allocate my assets wisely
I have heard successful investors say that asset allocation is the most important decision in an investor’s life.
I also agree that I must not keep all my eggs in the same basket.
Since I am new to investing, and don’t have much idea about various investment avenues, I will keep a large part of my money ultra-safe – like in a recurring deposit or short term deposits. This is the money that I may need in the next 3-5 years.
For all money that I can set aside for a period of over the next five years, I will try to find a few good mutual funds and start SIPs in them.
I may, in the future, own stocks directly. But that will happen only after I learn to understand businesses and can take my own, independent decisions to buy stocks. Till that time, 100% of my stock market investments will be via mutual funds.
I find a lot of my young peers trading in stocks at the very start of their careers. I will avoid that!
The three most important rules of my asset allocation will be:
- I will never invest in long-term assets with short-term money.
- I will keep my costs low and thus never trade in and out of assets frequently.
- I will not invest any money in stock market that I can’t afford to lose.
7. I will use debt sparingly
I have seen what has happened to the current and next generation in the western world. Their entire future has been compromised just because their parents and grandparents abused debt – they borrowed endlessly to fulfill their unending aspirations.
I will use debt sparingly and avoid borrowing money to meet my aspirations, expect for buying a home.
I will not borrow money to buy liabilities like gadgets, holidays, or even a car. I will buy them only if I can use my own money that I may save to buy these.
Even to purchase my home, I will use as fewer borrowings as possible.
8. I will practice Preparation + Discipline + Patience
These will be my three guiding principles while saving and investing my money.
I will develop into a lifelong self-learner through voracious reading in my free time; cultivate curiosity and strive to become a little wiser every day.
I know if I you want to get smart in my financial life, the question I must to keep asking is “why, why, why?”
I will try to keep things simple and remember what I set out to do. I will also remember that reputation and integrity are my most valuable assets – and can be lost in a heartbeat. So I will guard myself against arrogance.
Einstein said that compound interest is the eighth wonder of the world. I will never interrupt it unnecessarily.
Finally, I will enjoy the process along with the proceeds, because the process is where I will live.
9. I will hold on tight to my reputation
It has taken me years of hard work to reach this place where I have become capable of earning my own bread and supporting my family. I will not do anything that will destroy this hard work and my reputation.
For that, it’s very important that I take complete responsibility for my money, and never blame anyone when things go wrong.
I will never do anything that makes me uncomfortable. If it doesn’t make sense, if I get a feeling in my gut, or if I just don’t understand what someone is asking me to do, I will just pass on the investment.
My first objective will always be to avoid major losses. If I can protect my capital, I know I can always find ways to make money.
10. I will celebrate life, not money
I have seen many of my friends get into a rat race from day one of their jobs. I won’t follow that route.
Of course, I know that it is good to save and invest as much as possible, I won’t compromise my present for a future unknown.
This does not mean I will try to find happiness in spending money. What it means is that in the busy-ness of earning, saving, and spending, I will celebrate my life…and my accomplishments.
I’ve also read that real success in life is not about what you earn, own, achieve or win but who you will become along the way.
I will thus work towards ‘becoming’, not towards ‘having’.
It’s my life and only I can make it large.