ARE YOU 18? START MANAGING YOUR
MONEY
As you become a major, go through these
financial dos and don'ts to secure your future.
You may not believe in the magic of numbers, but
18 casts a special spell. Straddling the confusing cleft between youth and
childhood, the age marks an overnight Ascent to Adulthood. As a mint-fresh
major, you flirt with the new-found freedom, but need to focus on studies.You
can now operate your own bank account--the credit cards begging your
consumerist indulgence-but you don't have the money to splurge. You can get a
driver's licence, but can't afford a car. The power and pelf seem within reach,
and yet out of grasp. So, you decide to chill, putting off financial queries
and worries till another day in employee paradise.
You are not wrong, but neither are you right.
While you will fully deal with money and its intricacies once you start
earning, the intervening 4-5 years--between 18 and 23--are a crucial learning
period, a preparation for what lies ahead.However, most youngsters give it a
miss. Little wonder then that India lurked at the bottom of the pack, ranking
15 among 16 countries in the Asia-Pacific region, according to the MasterCard's
Index for Financial Literacy 2013 survey, held among 7,756 respondents in the
age group of 18-64 years.
A weak foundation leads to flawed perceptions,
faulty financial planning and wrong investments.So, it's a good time to start
now. But don't plunge headlong into it, and neither should the parents insist
on teaching it by force. “It should be considered a five-year plan, a slow
learning process,“ says Jayant Pai, Mumbai-based financial planner.“One
shouldn't try to drill too many concepts or start investing actively.The youth
should just read and learn and indulge in simple financial tasks,“ he adds.
This, then, is the take-off point for our cover
story. In the following pages, we shall explain how youngsters should initiate
themselves into the seemingly complicated world of personal finance without
being intimidated by it. There are, of course, many like Bengalurubased Saurabh
Tomar and Harit Mehta from Chandigarh, who have already taken tentative steps.
But there's more to money than making it. It's the management that separates
the rich from poor, the adults from youth.
YOUR FINANCIAL RIGHTS & DUTIES
The most effective first step towards any
journey is to know where you are. So begin by understanding your new financial
status and all that you can do now that you are 18.
Taxation: You will be treated as an adult for
all tax purposes, which means that your income will not be clubbed with your
parents and, if it is above `2.5 lakh a year, you will have to pay tax and file
returns. If your parents gift you any money, it will be tax-free, but the
income it earns beyond `2.5 lakh will not be.
Banking: You can, of course, open an independent
bank account and conduct all transactions, issue cheques, open fixed or
recurring deposits, conduct Net banking and have your own credit card. However,
refrain from taking any kind of credit or loan at this stage, unless it is for
education.
Insurance: An 18-year-old can also buy an
insurance policy in his name, though it is too early for most. “However, one
should study the benefits of health insurance and buy it early because it is
essential, the premium is low at this age, and it can save tax,“ says financial
adviser Pankaaj Maalde.
Investing: You can even start investing, be it
in the PPF or stocks and mutual funds, but first study the benefits and
drawbacks of each.
It is also a good time to apply for the PAN
(permanent account number) card and Aadhar card, along with your driver's
licence, because these are used while opening a bank account, investing in
stocks or mutual funds and filing tax returns.
WHERE SHOULD YOU START?
Isn't it enough to know what you can do? After
all, you are studying and there's plenty of time to learn about personal
finance, right? Wrong. This is the time--before you start working--to be
introduced to money matters.
Here's what will ensure a good grounding.
Here's what will ensure a good grounding.
Budgeting: You may not have too much money at
this stage, but even if you get pocket money or are earning a little through
freelancing, start budgeting. This is the most critical money management skill
for later life and will help you if you are leaving house to pursue higher
studies, be it in India or abroad. It is just a record of incoming and outgoing
money and the amount saved. Mohali-based Tarundeep Singh, 20, is already doing
it. “I get a pocket money of `3,000 a month and have fixed expenses like
travel, food and entertainment. I spend about `2,500 and save `500 on an
average every month,“ says the engineering student.
Budgeting is a simple exercise. Take a diary,
use an Excel sheet or a budgeting app on your mobile phone, and keep a record
of the money you have at the beginning of the month, the heads under which you
spend, and how much you are left with at the end of the month. A good idea is
to save first, 10-20% of the total amount.
Next, categorise your spending under two heads:
essential (food, transport, phone and other bills) and discretionary
(entertainment). If you feel you are spending too much under one head, you can
make the necessary adjustments in the next month. Besides ensuring that you
always have something saved for a rainy day, it will help you buy what you want
in a systematic manner.
Framing goals: Instead of hankering for the
things you desire or buying them erratically, learn to acquire these in a
systematic manner. Set a goal, say, buying a PC or an audio system. Find out
how much it costs and how much you will have to save every month, and you can
calculate the time in which you can purchase it. Alternatively, you can fix the
tenure and find out how much you need to save every month (see 5 steps...).
Instead of keeping the money at home or in the
bank, opt for a simple instrument like a recurring deposit to make your money
grow and it will take less time to buy it.Arushi Nayyar (see picture) is just
17, but has been a keen saver and goal-maker.“When I was in class VI and got
`50 as pocket money, I saved most of it because we were planning to buy an
almirah. My mother talked me out of it at the time, but now I have managed to
save systematically and make my first big purchase--a range of hair products,
worth `2,000,“ says the Noida-based teenager.
Research, study, learn: If you are studying
finance, you will imbibe the basic concepts, but if you aren't, it's best to
familiar ise yourself with these. “Understand terms like inflation, taxation,
risk appetite, diversification, compounding, etc, since these will impact you
as a working adult,“ says Pai.
If you don't know about inflation, you will not
understand that the money you save for a goal 20 years away may not be enough
by the time you reach it. This is because inflation reduces the value of money
and you are able to buy much less with the same amount. For instance, an 8%
inflation means that you will have to spend `1.46 lakh in five years to buy the
same thing that comes for `1 lakh today.
Similarly, you will delude yourself into
believing that you have a high earning or profits if you are not clear how
taxation can eat into these. “Do your homework before you start working. Read articles
on personal finance, research online, watch TV programmes, attend workshops or
seminars,“ says Maalde.
The Internet is a good source of information,
with various websites like Investopedia.com acting as financial dictionaries.
Banks like the RBI also have interactive sites for educating youth. Harit (see
picture), 19, is on the right track. “I am very keen to know about taxation and
mutual funds, as well as the costs and benefits of various products,“ says the
engineering student from Chandigarh. For this, he is planning to tap the
Internet and his mother, who is a banker and can guide him suitably.
Assets & investments: To reach your goals
faster, it is important to make your money work harder by investing it in
growth instruments. However, it is better to first familiarise yourself with
the asset classes. “Don't yearn for activity just yet. Learn how not to lose
money, instead of making it grow. Do this by understanding financial products,“
says financial expert P.V. Subramanyam.
The broad segregation of asset classes (see
Where should you put your money?) is equity (stocks and mutual funds), debt
(small saving and fixed income schemes like the fixed and recurring deposit, or
PPF), gold and real estate. Know how and when to invest in each, the rate of
return or how fast it will multiply your money, the risks involved, the fees
and tax applicable on gains, the term of investment, and the way to redeem your
investment. “Learn the financial math involved; how small amounts grow into a
huge corpus, or how few products are actually needed to build a high-yield
portfolio,“ says Subramanyam.
If you do have a regular source of money like
monthly allowance or earnings through freelancing, start with simple
investments.“The simpler the better. Begin with banking. Understand how a
recurring deposit or even a sweep-in account will pay more at 8-9% than an
ordinary savings account,“ says Pai. This is exactly what Harit did. He chose
the fixed deposit to put the money that he earned through online freelancing,
finally encashing it to buy a car.
It's also a good idea to start a PPF account in
which you can separately invest up to `1.5 lakh a year, instead of clubbing the
contributions with that of a parent.
It is, of course, not a good idea to try your
hand at risky options like stocks, or the unfeasible ones like real estate,
which require a large amount of money. Wait till you start earning before doing
so.
HOW TO MAKE & MAXIMISE YOUR MONEY
Times have changed and a youngster no longer
needs to be at the mercy of his monthly allowance. There are several options he
can tap to swell the savings in his humble piggy bank.
Internet: Saurabh is 19 and has
been earning for nearly four years now.“I've delved into online surveys, social
media marketing, apps, blogging, and what you will. It helps me earn a cool
`10,00015,000 a month,“ says the student of Media Studies.
Harit is as active. “I've always been interested
in making money and got my first payout in class X. I do blogging and
marketing, and create content for websites. At one time I was making $400-500 a
month,“ he says. Little wonder then that he recently bought a car with his own
money. “I had stopped to focus on my studies, but since I've exhausted my
savings, I will have to get back on the Net again,“ he adds.
You too can earn a handsome package by creating
content, marketing or blogging.
Hobbies: If you are good at baking or
photography or writing, leverage your talent to earn money. Ad vertise through
social media like Facebook, approach publications, distribute pamphlets and
make yourself known to earn on the side.
Part-time jobs: There are various part-time
options you can look for on job search portals like Firstnaukri.com and
Searchmycampus.com, which cater specially to college students.Such sites faciliate
interactions between students and employers and you can find jobs based on your
qualification, location, and preferred industry.
College activities: Sports or cultural fests are
an easy way to supplement your allowance in college and university. “I made
`3,000 in a week by helping organise a football tournament,“ says Tarundeep. So
did Kanav Gupta, a B.Com (honours) student at Delhi's Shri Ram College of
Commerce, who made an easy `1,000 at the college fest by selling passes.
Online sales: If you're no longer using your gym
equipment, or the audio system seems oudated, or the books from previous
semesters are gathering dust, just sell them. With websites like Quikr.com and
OLX.in easing the task of selling unused household stuff, you can easily make a
fast buck to add to your pocket money.
Stretch your money: While it's getting easier to
make money and your parents are ready to fund most of your needs, it is a good
idea to make your money go the extra mile.Do this by being a smart spender.
Look for online discounts on food, movies and entertainment the next time you
are out with friends. Zero in on special student discounts, if possible. Better
still, bring down the cost drastically by partying at home.
Do not indulge in impulse purchases, especially involving
gadgets that are likely to be upgraded in 3-6 months. Opt for used or outdated
versions of smartphones and tabs that are still fully functional but come at
much lower prices. Reduce your study costs by pooling in with your friends to
buy expensive books, CDs or computer games. Sell them later and share the
gains. These simple strategies will bring down your costs and help you save
more for bigger goals.
Avoid credit cards: If you are truly keen about
saving money, make sure you don't fall prey to the glamour of credit
cards.Banks are likely to pursue you and tempt you with dreamy offers, but
these are one of the most expensive forms of loan and are best avoided. Rolling
over or paying the minimum amount is the surest way to fall into a debt trap. So,
wait till you start working before buying the cards.
ROLE OF PARENTS
Parents play a crucial role in the transition
process, not just by making the child sign various documents to pass on the
savings or investments, but also by inculcating the right saving and investing
habits. “They should involve the youth in financial discussions like budgeting
and spending so that they are not only aware of how the household is run, but
also know about the family's financial situation,“ says Subramanyam.
So if the child wants to study abroad and the
parents can't afford it, they should not do so by mortgaging the house and
risking their retirement. Instead, the child should be explained the financial
situation and encouraged to take an education loan. It will not only reduce the
parents' burden, but the repayment will make him responsible. “Similarly, if
they can afford only education, not marriage, they should tell the child and
help him start saving or investing towards it,“ says Maalde.
Remember, however, never to dictate to the child
and force him to follow in your footsteps. “They are very resistant to being
taught and are more likely to spend than save. Guide them and let them explore,
not tell them what to do or where to invest,“ says Pai. Do this by explaining
the various avenues of investment, their pros and cons.
Above all, show the child the benefits of
saving. “Saving, not investing, is the best learning at this stage. Make them
save 1020% of the money they get and it will not only become a habit for life,
but also help build a sizeable corpus by the time they start earning,“ says
Maalde.
RIJU DAVE
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ETW11MAY15
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