Millennials form a large part of the Indian workforce and are slowly becoming the main breadwinners. However, Indian millennials are making a sad figure when it comes to savings. The savings trend takes a back seat for most millennials, as reported in a Deloitte survey that found that Indian millennials save less than 10% of their income.
Given the times we live in, savings should be a top priority, and the good thing is, it’s not rocket science. Millennials can start their savings journey in 2022 with minimal hassle thanks to these easy ways.
1. Strictly apply the 50/30/20 budget rule
The 50/30/20 budget rule is a simple and effective way to manage your finances and soak up the habit of saving. The proposition under this rule is simple. You spend 50% of your income on basic necessities, that is, essential expenses. These include:
- To rent
- Grocery and utility bills
- Children’s school fees
- IME and insurance premium
After spending 50% on needs, wants represents the next 30%. Desires are lifestyle expenses such as dining out, buying that expensive gadget that goes over budget, etc. More often than not, needs become wants when we take them beyond the basics. After meeting the needs, millennials need to save 20% of their income.
The beauty of this rule is that millennials can apply it regardless of their cash flow. This gives them the opportunity to save at least something on their income. The 20% savings each month will add to a considerable body of work in the future.
2. Start a systematic investment plan (SIP) in mutual funds
A systematic investment plan or SIP in a mutual fund is another option millennials have to start saving. In a SIP, a specific amount of money is deducted from your savings account and invested in the fund of your choice on a fixed date. SIPs bring discipline to investing and help build up the desired body of work for different life goals in a disciplined and sustained manner.
However, the latent advantage of SIP is that it results in forced savings. As the money is invested on a particular date, it automatically results in the desired savings. SIPs bring other benefits to the table. They help you:
- Stay invested through market cycles
- Help accumulate more units when markets are down and vice versa
- Is imbued with a disciplined savings habit
- Brings long-term composing power that exponentially increases your wealth
Depending on their needs and their cash flow, millennials can set up SIPs on a weekly, bi-monthly or monthly basis. SIPs in equity mutual funds also help generate long-term above-inflation returns and help achieve long-term goals like child rearing and retirement.
However, for SIPs to generate the desired returns, choosing a fund with a consistent long-term performance history is crucial. New investors must be KYC compliant before launching SIPs in the fund of their choice.
3. Avoid lifestyle expenses
Over-indulging in lifestyle expenses can be counterproductive. Thanks to digitization, millennials can easily get loans with just a few clicks. There are several portals and applications from which one can apply for loans in a jiffy. However, these lifestyle related loans are an expensive proposition. They carry a premium rate of interest which pushes the EMI amount significantly.
This puts a strain on finances, and if even an IME is missed, the credit score takes a hit. Additionally, lifestyle expenses do not add any real value to wealth. In tough times like Covid-19, sustaining lifestyle expenses can be quite difficult when income is already under pressure.
Millennials can save that money, which could significantly enrich their corpus in the long run. Avoiding eating out every weekend, avoiding the urge to change your smartphone every six months, and making small lifestyle changes all save a good amount of money.
4. Buy health insurance
A medical contingency can wipe out some of the savings all at once. Even a few days of hospitalization can result in bills of several thousand rupees. However, things can be different with a health insurance plan in place.
A health plan avoids personal expenses and ensures that funds are not in short supply to receive the best possible treatment. For millennials on the subways, it is advisable to purchase a health plan with a sum insured of at least INR 10 lakh. A floating family plan is ideal for providing coverage to all family members.
In addition to buying a regular health plan, millennials should also expect to purchase a critical illness insurance plan. Treatment for critical conditions such as stroke, kidney failure, liver transplantation, etc., is quite high, and the coverage provided by a regular health plan may not be sufficient to cover the full cost. processing.
In such a scenario, a critical illness insurance policy comes to the rescue as it provides a lump sum to treat the illness, regardless of the cost of hospitalization. Critical plans are fixed benefit policies, unlike regular plans which only reimburse actual hospital costs.
5. Do not incur unnecessary debt
Taking on unnecessary debt can often become a noose around borrowers’ necks. Not all forms of debt are bad. Debt used to learn a new skill or buy an asset is good, but debt to get instant gratification could get in trouble for millennials. Swiping credit cards for every small purchase is not a good idea because credit card interest rates are higher.
Also, paying only the minimum balance is undesirable. Therefore, before going into debt, millennials should analyze whether they need it or not. It is equally essential to read the fine print of the loan documents to avoid surprises later.
Much like investing in stocks, millennials need to take a long-term approach to saving. They should start their savings journey the day they start making money so that they are on a solid financial footing and can get through the ups and downs with ease.