6 Golden Financial Planning Rules For Millennials (2024)

There has never been a group of people that has changed the way the financial industry views them quite like millennials. A generation that has seen major technological advancements and economic developments within their lifespan, as a group, they are caught between traditional financial values and a contemporary lifestyle that is vastly different from that of the generation before them.

According to a 2020 PGIM India Mutual Fund survey, 51% of urban India has not made retirement plans since 59% of their income goes to current expenses; it is no surprise then that savings and investments are placed on the back burner. Add to this the results of the Deloitte 2020 Millennial Survey, concluding that 80% of millennials were concerned, even stressed out, about their finances.

So why is this happening?

There are various factors that millennials face that generations before them have not; higher costs of living, especially in metropolitan cities, personal and professional aspirations that are constantly trending upward, increasing competition, which makes securing a salary that meets one’s lifestyle and needs all the more difficult among others. The biggest factor among these is the sheer lack of financial education that has led to delayed and experimental forays into savings, investments and financial planning. Here’s what millennials need to know about it.

What is Financial Planning?

Financial planning means figuring out what you’re going to do with your money so that you can make the most out of it in order to meet your various financial goals. It allows you to systematically and sustainably meet your goals in the short and long-term while bearing in mind your current resources. These goals can be anything from an emergency fund to retirement planning, insurance to investments and vacation funds to large purchases, like a car or house.

Essentially, you route your salary in different directions because your money can work just as hard as you do to pay for your needs in the future. Figuring out the details of how much money you have, what you need in the future, how much you can save and in what ways is what financial planning is.

Why is Financial Planning Important for Millennials?

It’s vital to understand that financial planning is critical for everyone. Good financial planning helps you tackle certain factors that simply saving money would not help in overcoming. For example, inflation, the slow but steady increase in the price of goods and services as the economy grows and changes. The same INR 5,000 is worth more now than it will be in five years’ time. Clearly, planning finances is crucial for all age groups, but it is particularly important for millennials.

Despite having seen the world adopt technology and the internet at unprecedented rates, millennials themselves grew up with little to no access to financial literacy, meaning that even the basics of personal finance are potentially difficult to grasp, whether it’s filing income tax returns or setting up savings. Add to the mix readily available credit lines that come at uncertain costs along with inexperience in managing your debts and repayments, and you have a pretty volatile financial situation at hand.

The economy will continue to change, as it has always done, whether it takes an event years in the making or one that develops overnight. The Covid-19 pandemic is one such example, causing a significant slash in GDP, unemployment, the halting of manufacturing, and general uncertainty, affecting millions of Indians. It was during this time that perhaps our vulnerabilities became exposed, especially our financial ones. It showed that things as certain as our income flow can change without a moment’s notice and that we all need to prepare better. For this purpose, millennials need to follow some rules.

6 Golden Rules Of Financial Planning For Millennials

1. Start somewhere

Financial planning can seem like a daunting task, especially if you’re doing it for the first time. That being said, you have to start somewhere, even if you do so slowly and in small steps.

A good first step would be to start by tracking your monthly expenses; how much your salary is and what are you spending it on currently, then moving on to how much you should be spending and saving according to your future financial goals.

It is always helpful to make a list of your short-term and long-term financial goals, from needing a new desk to wanting to buy a car or taking a vacation. This way you have an idea of how much money should be directed towards which goal and for how long.

Don’t shy away from doing your own research and asking for help from family, friends and professionals but remember that you know your finances best and it must be you who plans them.

2. Manage your money

Savings are the lifeblood that fuel investments, purchases and financial goals in general so it is worth it to discuss just how much you should be saving. Financial experts usually recommend that you use a 50-30-20 ratio; 50% of your salary spent on current expenditures like rent, commute, food, 30% on personal expenditures like clothes, online courses, etc and 20% going into savings.

It’s important to state at this time that there’s no one size fits all when it comes to personal finance. Many experts estimate that in order to maintain your lifestyle post retirement, it’s better to save 30% and over and this number would increase depending on how ambitious your financial goals are (someone wanting to purchase a car and move abroad would have to save more than someone wanting to purchase a TV and take a correspondence course for example).

3. Take care of the basics: insurance is a must

Until just last year, India had an extremely low adoption of insurance products. Many Indians considered them a luxury or didn’t deem them necessary, choosing instead to pay out of pocket because the cost of the premium was too heavy on their pocket. Whatever the reasoning, we have all found just how risky it can be to play the odds without being covered. Taking care of yourself and your loved ones in unforeseen circ*mstances is not a luxury but a necessity.

Not only does insurance protect you from risk, if you get a policy with sufficient coverage, it actually saves you money in the long run since paying out of pocket not only costs you more but can eat into your savings, setting you back by months.

There are a variety of insurance policies available in the market from health, life, term to child, fire, and liability. If you have ownership of something high-value, exploring insurance options would be prudent but optional; health and life insurance, however, are a must and you should invest in them after careful research.

4. Invest according to your goals

No one invests exactly the same as someone else. Each person is different and their risk appetite will determine their investment style. Risk appetite is how much risk someone is willing to take while investing; generally high risk investments also yield high returns whereas low risk investments yield lower but stable returns over a longer period of time. Whatever you choose to invest in, ensure that they correlate to your financial goals. For example, investing in a pension scheme if you want to secure the years after retirement or in medical insurance so you don’t end up spending extra money out of pocket in case of an emergency.

There are multiple investment options like mutual funds, stocks, direct equity, bonds, real estate, gold, and so on. Before investing in any of these, remember that you should assess your resources. If you’re low on savings or have none, start small with an Systematic Investment Plan (SIP) so you can get started without sacrificing your current financial health.

Once you’ve started to save more, you can move on to investments in different options depending on your comfort. Ensure that you invest according to your goals and appetite after doing sufficient research rather than blindly investing based on what’s trending or what you hear; what works for someone else might not work for you.

5. Diversify your investments

Diversifying your investment portfolio can sound scary but it’s nothing complicated. If you’ve heard the phrase, ‘everything in moderation,’ then you already know what portfolio diversification is. As just mentioned, there are different risks associated with different avenues of investments. Mutual funds would be considered higher risk on the whole than putting your money in a fixed deposit but that’s also the reason why the returns on your investment are higher.

That doesn’t mean you should only invest in mutual funds; in order to offset the risk you’re taking by investing in mutual funds, you should simultaneously invest in something with lower risk but steady rate of return. The whole point is to ensure that you’re never taking too much risk, you’re protected by short term shifts in the economy and that any losses incurred are mitigated in the long run. This is of course a simplified view since there are numerous ways to diversify your portfolio of investments but this should be enough to get you started.

6. Plan for your retirement as soon as possible

Retirement planning is one of the main objectives of financial planning. The kind of savings, investments and financial decisions you make today will have a direct impact on the kind of retirement you’ll have. None of us will work forever and since most people do not have the security of a pension after we retire, it’s important that you have a source of income to maintain your lifestyle, help you stay independent.

It’s crucial then to save as much as you possibly can, invest in schemes that are specifically designed to help you during your retirement, like the National Pension Scheme or the Post Office Monthly Income Scheme, as well as other slightly more lucrative avenues to continue to generate and build your wealth.

For many people, financial planning helps them achieve the milestones in their lives that are markers of success and security. It’s something that none of us can do soon enough and all of us should do our best at. Before, financial planning was considered something normal, everyday people wouldn’t be able to grasp or control.

Bottom Line

Millennials have already understood that they need to take charge of their capital. As per data from Computer Age Management Services, (CAMS), an agency that services 68% of the country’s mutual funds, nearly half of the 3.6 million new users they onboarded in the financial year 2018-19 were millennials.

We are living in a time when we all have unprecedented access to information as well as the tools to be able to understand and leverage our financial resources to our advantage. From expense management apps on smartphones to platforms that allow you to directly invest in the stock market without a middleman, we have come a long way; it is then our responsibility to make the most of our money for our own sake.