There is one annoying thing many parents do. They ask their young adult children to speak to other adults for good advice. They somehow believe that someone else can say things their children should know, more effectively. Usually this fails. Young adults are mostly shy, worry about being judged, and don’t identify with the generalisations they hear. But columnists like me don’t give up. A friend asked me to offer personal finance advice to his son who has just graduated and is moving to a new city to work. I told him I would write a column instead. The young man may or may not read it; but I saved him some squirmy moments I thought.
Being financially independent is wonderful. To step into that adult world where one feels empowered to make one’s own decisions especially about money is very nice. So here is my list for young earners.
First, avoid front-ending many big ticket expenses. That you have now begun to earn a good income that comes in every month, be careful about what charges you are imposing on that money. Rent, utility bills, food, travel are mandatory expenses you will incur. Keep at these basics for sometime before deciding that you need a vehicle to commute; or a well furnished apartment; or that you will eat out everyday. Allow the experiences of living by yourself to flow in, before making modifications for your liking.
Second, the money skill you need to learn as a young earner is managing liquidity efficiently. Money is a limited resource and the many small expenses will all add up. Learning to be conscious about spends, keeping an eye on the bank balances, making sure it lasts all month, are essential skills. After being carried away a bit, everyone returns to checking the balances and making decisions accordingly. Make it a habit to keep track and stay within your means.
Third, set up auto pay for your utilities. It is very common for young earners to procrastinate about payments for rent, phone, electricity and such. Take the time to set up these transfers. There is no efficiency in trying to postpone and hoping to manage multiple payments manually. Defaults can impact service and credibility.
Fourth, get yourself a credit card only if you must. It is easier today to make electronic payments from your bank account. Pay off the student loan in regular monthly instalments. Your credit card can wait until you have developed the skill to manage your cash inflows and outflows efficiently and are not running short at the end of the month.
Fifth, develop the skill to make choices with your money. Don’t make it a habit to spend because you feel entitled about it. From being stingy and refusing to allow basic comforts for yourself, to being a lavish spendthrift, there is a wide variety of choices about who you would like to be. Considering your choices and taking the time helps you make better money decisions. Where you choose to live impacts your rent expenses, how you choose to eat impacts your food bills, and so on. Make them your decisions, experience the impact and learn.
Sixth, take care of the paperwork. Many young earners find it very bothersome to do the paperwork. It is an essential personal finance skill. Complete the KYC process to open an investment account with your bank or broker, so you can begin to save. Very likely you will need it for your taxes. Complete and file that tax return. Register your mobile number and track your provident fund balances. Move it with you when you change jobs or phones. Link your personal— not work—email to your transactions. File and claim the reimbursements you are entitled to at work.
Seventh, have no qualms about splitting expenses. There are beautifully efficient apps that will keep accounts in the background when friends eat out, travel or take trips together. Simply logging in every expense is enough. At the end of the trip you will know who owes whom how much, after splitting all expenses equally. It is common to use these apps while dating someone too. It is your money and there are ways to gracefully pay your part and hold back generosity that you can ill afford.
Eighth, be aware that the most common personal finance problem among young earners is unpaid debt. Many imagine that they can somehow get away with default. It is increasingly difficult to do so; interest simply piles up and collection agencies can be nasty. Build that integrity in your financial transactions. Even if it is a hand loan from a friend, make it a point to repay. Remember that your credit card is a costly loan from your bank. There is no joy in spending borrowed money recklessly.
Ninth, discount the advice you will receive about settling down in your own house and about planning for retirement. Yes, starting early has its merits. But not mandatory. Many of us elders can tell you how easy it was to save, invest, plan, acquire and manage assets after we achieved a career growth that enhanced our incomes. Your focus must be on your career and your income. Don’t lose the flexibility to move and change jobs for your good. Keep away from that house EMI burden and pay rent. Don’t buy insurance to save taxes.
Tenth, your provident fund is already taking a part of your income and investing it for you. That is a good start. Don’t overarch your savings and leave yourself with too little to spend. Our generation lives with many elders gone beserk with spending in their fifties, trying to make up for their extremely frugal young years. Money decisions are tough—you can neither spend without guilt, nor save without sacrifice. Strike your balance and trust yourself to find it with time. Percentage allocations is a good technique where you allocate a limit to all the expenses you desire.
Personal finance is not rule bound. The listing is to make for easier reading than to write some kind of rule book. It is with experience that you learn how to manage money. Being deliberate and taking the time to see how actions and their consequences come together is part of the growing up routine. Finance is not different.
