Friday, November 4, 2011

Six Tips for Young Adults

Young adults are perhaps the richest among all of us. They have something more than all of us – “time” at an age when the possibilities are unlimited. In case you are an young adult in 20s or 30s or a parent / guardian with children approaching or in their 20s, this article is for you. The article tells us few things which perhaps we were never told when we were young. We bring to you six valuable tips that can literally make a huge impact in lives of young adults going forward.
  1. Learn about Personal Finance & Investing:
Knowledge about personal finance topics and investing at an early age is a great asset. Young adults must know about different asset classes, investment products, insurance, loans & credit, time value of money, inflation, savings, taxation, financial planning, etc. Such knowledge, especially during early years of career can really help someone take great decisions for future. If you are a guardian, be sure to involve the young adults in your own investment decisions. There are many ways in which young adults can gain financial knowledge. Some of the ways are...
  • read books, finance magazines and watch TV shows on investments
  • interact with financial advisors, accountants, experienced family members
  • attend investment seminars/ camps by regulators, participants in financial services industry
  • enroll for any certification from the many offered by NSE/ BSE on the subject matter

  1. Control your spendings
Young adults are perhaps the most valued consumers hunted by every big brand ranging from cars to shoes to laptops to even holiday packages. With the newly gained earning power and lack of big responsibilities, it is natural that spendings on entertainment, gadgets, accessories, hanging out / parties, etc. form a big chunk of the spendings. Surely it is a time to enjoy life but young adults are advised to control their urge to spurge and not make impulsive decisions. It would be great if one can budget such spendings and avoid taking big decisions like buying of motorbikes, cars, laptops, etc. without adequate thinking and research.

  1. Start investing immediately:
We have often spoken on this topic. The benefit of saving early can never be under estimated. Even if the savings is small, due to the power of compounding, the wealth created by you can be enormous, as seen from the following matrix.
Particulars Mr. Smart Mr. Lazy
Age when savings is started 25 years 30 years
Monthly savings amount # Rs.1,000/- Rs.2,000
Investment horizon 10 years 5 years
Total amount saved Rs.1,20,000/- Rs.1,20,000/-
Wealth Created at Age 35 yrs * ~ Rs.2,63,000/- ~ Rs.1,75,000/-
Times roll-over 2.19 1.46
# Assuming SIP in a Mutual Fund Diversified Equity Scheme is done. 
* Assuming average returns @ 15% p.a.
In above e.g., Mr. Lazy would have to invest thrice the amount or Rs.3,000 monthly  saved by Mr. Smart if he wants to match the wealth created by him at age 35.

  1. Get PAN & start filing tax returns:
If you have started earning, it is best to start preparing & filing income tax returns (ITR) except when you are exempted to do so. There is a perception that if the taxes are paid, there is no need to file ITR. This is a misconception and it is essential to know that it is our constitutional obligation to file ITR when you are required to do so. Further still many believe that their incomes are too small to attract the attention of IT authorities and get tax scrutiny and hence may indulge in not filing returns or understating income. You may note that IT authorities uses a system whereby cases are picked up randomly on certain criteria. You may never like to be the one to get short-listed and invite unnecessary hassles. Remember that you are permitted to save taxes but not evade taxes.
Filling of ITR has many advantages as they are considered standard income proof globally and they help you while applying for loans, visa applications for jobs abroad, requesting tax refunds, etc. The PAN issued by IT authority is a prerequisite for filing ITR and is also mandatory for all financial transactions. So it makes sense to get yourself one even if you don't have much income to talk of. 
  1. Get health & life cover
Getting adequate protection in young age, where people tend to be more adventurous, is highly advised, even if there aren't any dependents on you. Buying health or life cover at a younger age is also considerably cheaper than buying the same after few years. Such protection can really help one in case there is any unforeseen emergency and financial burden on parents will be avoided.

  1. Start thinking about home
The average age of home & car buyers has decreased dramatically in the last 20 years. Powered by easy availability of loans, fat pay packages & growing aspirations, the first time home buyer today is often around the age of 30. The first time car buyers are even younger. It would thus be best advised that young adults keep these goals in mind and start saving as much as possible for home & car goals, if any, from now onwards. It would really benefit you a lot when the time comes for purchase in near future. Often young adults delay saving for the goal and end up paying lesser down-payments and taking higher amount of loans which should be avoided. Lastly, even if you have a home of your own, it is advisable to think of buying a home as an investment for future and also enjoy tax benefits on same.

Having time on your side is a great advantage and never to be missed. Few young adults may choose to ignore & not act on 6 tips shared above at their own peril. Experience has shown that wise decisions, actions and discipline in these formative years go a long way in securing a better financial future down the line. Simple actions taken today can help you avoid taking tough decisions at times when you have family to support and lot of responsibilities on your hands. So go ahead and make the best that this time has be offer, smartly.