Financial planning for young and restless
Posted by ayadav242 on September 2, 2008
The Indian youth never had it so good. On the consumption side, the choice of goods and services available is unprecedented. And as far as income is concerned, given the blooming economy and its ever-improving prospects, opportunities have never been better. So, the youth is earning a lot and spending a lot.
It’s definitely a happy situation to be in.
As a college student, you should be focussing on your financial future as well as your studies. No, not the financial future consisting of next week’s pizza fund, but your long-term personal financial future. Make sure you start your life after studies on the right financial foot by treating your financial future seriously while you’re still in college.
Young investors have an edge over others on account of their age. In other words, a young investor has more time on hand as compared with a middle-aged investor or one who is nearing retirement.
Young investors can take higher risk as compared with middle-aged investors or nearing retirement investor. This in turn affords young investors greater flexibility while making investment decisions.
If we take an example, considering most young people spend Rs 500 every month, then calculate how much money they are losing. It can be illustrated with the help of compounding method.
The percentage of younger generation in India is higher compared with the older generation. Over the past couple of years Indian economy has seen unprecedented boom, leaving surplus money in the hands of people.
The young can use financial planning route to meet their future goals. They have their whole life ahead of them and ample time to plan for every goal including retirement. The problem with the masses is that they do not plan their finances. Some who have decent salary packages and enough surplus available also invest without doing proper asset allocation in various asset classes such as equity, debt, real estate, gold etc.
There are various investment avenues available to young investors and the various facets of each avenue such as small saving schemes, equity, mutual funds, ELSS, unit linked insurance plan etc.
Today’s youth should ensure that he is associated with the right investment advisor at all times. He could well be the individual who plugs the gap between youth achieving or not achieving his financial goals and objectives.
Financial markets have become very complex and there are varieties of products available to choose from. The choice of product will depend upon:
The age of the client
The time horizon of investments
The risk appetite of investor
Need of the investor
As a thumb rule, a person shall invest 100 minus his/her age percentage of his/her portfolio equity and the remaining in debt, after providing for sufficient amount in the form of liquid assets/cash for emergency provision. A person shall also plan for the purchase of a house.
If a young person has a high-risk appetite and the time horizon of investments is also long, he should invest more money in equity and equity-related instruments and fewer amounts in debt. When a person starts working, his income level is also low and there is very less surplus available for investments after meeting his monthly expenses. Every young person would like to become rich faster.
Small savings per month, if done in a disciplined and systematic manner, will lead to a higher amount of wealth accumulation over a longer period of time.
If a young person (23) starts saving Rs 2,000 per month till his age is 60, he will be able to accumulate Rs 3,96,06,204, if rate of return on investments is 15% pa. In this case I have not taken into consideration the increase in salary and thus increase in amount of investments.
The young investors first have to do their asset allocation. After deciding about asset allocation, the choice of products will start.
The writer is a certified financial planner and full member of FPSB India and working as academic and regional head (western region), International College of Financial Planning, Mumbai.
FPSB India relies on its members’ prudence, competence, and ethical standards to have submitted this write-up in good faith in their personal respective capacities.
