Millennials can learn financial lessons from the discipline of their parents

As one of the fastest growing economies in the world, India is at the centre of much global interest. Increased investments and development initiatives are creating opportunities for Indians, leading to an improvement in their income levels. Millennials, comprising 46% of the workforce, are the primary beneficiaries of this economic growth.

According to a study, 80% millennials regard 'wealth' as the top life goal. Even though they are aware of the need to plan their finances to create wealth, various financial traps set them back on this journey. With disciplined money management, however, any goal can be accomplished. Below are a few simple steps that millennials can take in their pursuit of wealth creation:

Have a plan in place

Apart from wealth creation, millennials pursue a host of other short-term goals as well. Travel, higher education and latest gadgets top this list. While it is good to have clarity on goals, without a detailed plan of action, these goals will be nothing more than a fantasy. Start off by listing your financial goals. This list will help you to weed out goals which seems important in the short term but may affect in the long run. Next, assign each goal a time frame, dividing them into categories such as short term (less than a year), medium term (3-5 years) and long term (more than seven years). This will help you to select the right investment instruments to accumulate requisite funds within the stipulated time. To create wealth, ensure that you do not compromise on your long-term financial stability for short-term indulgence.

Invest wisely

A study points out, even with lofty financial goals, 57% of millennials still park their money in fixed deposits. While it is crucial that you invest to make your money work for you, the key to success in this process is selecting the right investment options. FDs alone cannot help you to accumulate inflation-beating returns. If wealth creation is your goal, investment in equity instruments is imperative. To give you a perspective, from 1979 to 2018, when the average inflation stood at 8.1%, FDs offered an average return of 9%, gold offered a return of around 10%, real estate investments offered 13%, while equities offered 16% returns in the same duration. In spite of its superiority as an investment option, many investors are wary of equities. Millennials, however, being savvy and more willing to explore new options are better equipped to tap the potential of equity. With some research and advice from experts, invest in fundamentally strong stocks to build long-term wealth.

Have patience

Wealth creation is certainly not an overnight exercise. It takes time and requires patience. Regular investments, with an expectation that they will appreciate in value over time, is at the core of the wealth creation process. It entails the acquisition of assets such as equity, gold, real estate, etc, believing that their price will go up in the future, creating wealth when disposed of. Since it is a long-term process, it is advisable to not get perturbed by short-term fluctuations. This is all more crucial when it comes to equity investments. Any short-term market correction sends investors into a panic mode, leading to an unwise 'sell' decision. Remember, even after going through a number of recessionary phases, global equities have given more than double the returns on an average per year. To succeed in this endeavour, hold on to good quality assets.

Break the debt cycle

Armed with credit cards, millennials are indulging in expensive transactions that they cannot afford. Relying heavily on credit cards can compromise future financial prosperity. Hence, use credit cards only for unavoidable, big-ticket transactions. Limit the number of credit cards to one or two. Make payments on your cards ahead of the due date to avoid ballooning debt. For other liabilities, such as home, personal or education loan, carefully understand the terms and conditions from your bank. Compare the interest rate offered by various financial institutes. Once you go for a loan, ensure that you honour your monthly EMIs to avoid penalties. In case you get a windfall lumpsum payout, such as a bonus, instead of indulging, prioritise loan repayments. Start by paying off the highest interest loans. A debt trap serves as a drain on wealth creation making it important to break the cycle at the earliest.

Check your money habits

When you are struggling with maintaining your monthly expenses, savings and investments seem a bit far-fetched. It, therefore, becomes vital that you keep a check on your money habits. Track where your money is going. Maintain an account of daily expenses to identify which spends to avoid or minimise. Make a rule to compulsorily divert a certain portion of your salary to savings as soon as you receive your paycheck. Aim to save at least 20-25% of your income every month. Review your finances regularly to check the progress. Make sure you understand the tax structure well, to minimise the overall impact of taxation.

Raise your financial awareness

While millennials are more aware of the need to plan finances, there is still some work to be done in raising financial awareness. Knowledge of different financial concepts is important to make better investment decisions. There is a lot of content available to help you clarify your doubts and understand the implications of your choices. Instead of relying on investment tips from your friends and relatives, do thorough research to select the best options for your goal. By actively seeking information, you can avoid various pitfalls that you may encounter in the process.

While millennials have a clear advantage over their predecessors in terms of greater exposure to financial markets and information, they can learn a lesson or two from the discipline of their parents. Combined with their willingness to learn and experiment, a systematic approach will help them to support the lifestyle that they aspire without giving up on future financial well-being.

The writer is MD and CEO, Axis Securities