Millennials make up a significant part of the Indian workforce and are slowly becoming the main breadwinners for families. However, the Indian millennials cut a sad figure when it comes to saving. The propensity to save fades into the background for most millennials, according to a Deloitte survey that found that Indian millennials save less than 10% of their income.
Saving should be a top priority in our day and age, and the good thing is that it’s not rocket science. Millennials can start their savings journey in 2022 with minimal effort using these simple methods.
1. Strictly implement the 50/30/20 budget rule
The 50/30/20 Budget Rule is a simple and effective way to manage finances and start the habit of saving. The theorem after this rule is simple. You spend 50% of your income on the bare essentials, i.e. on expenses that are an absolute must. These include:
- Food and utility bills
- Education contribution for children
- EMIs and insurance premium
After 50% has been spent on demand, the next 30% of the expenditure must be met. Wishes are lifestyle-related expenses such as going out to eat, buying expensive appliances that are beyond budget, and so on. Most of the time, needs become wants when we exceed them. After the millennials have fulfilled their wishes, they must save 20% of their income.
The beauty of this rule is that millennials can apply it regardless of their cash flow. It gives them the window of time to save at least some of their income. The monthly savings of 20% will add up to a substantial corpus 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 available to start saving. With a SIP, a certain amount of money is debited from your savings account and invested in the fund of your choice on a fixed date. SIPs bring discipline into investing and help to build the desired corpus for various life goals in a disciplined and sustainable manner.
However, the latent benefit of SIP is that it creates forced savings. Since the money is invested on a certain date, the desired savings result automatically. SIPs have other advantages. They help you:
- Stay invested across market cycles
- Help pile up more units when the markets are bearish and vice versa
- Picks up a disciplined saving habit
- Brings in the power of compounding over the long term that grows your wealth exponentially
Depending on their needs and cash flow, Millennials can set up SIPs weekly, fortnightly, or monthly. SIPs in equity mutual funds also help achieve long-term outflationary returns and achieve long-term goals such as children’s education and retirement.
However, in order for SIPs to achieve the desired returns, choosing a fund with a consistent long-term track record is critical. First-time investors must be KYC compliant before launching SIPs in their chosen fund.
3. Avoid lifestyle expenses
Over-investing in lifestyle spending can prove counterproductive. Thanks to digitization, millennials can easily take out loans with just a few clicks. There are several portals and apps that can be used to apply for loans in no time at all. However, these lifestyle related loans are an expensive endeavor. They carry a premium rate that increases the amount of EMI significantly.
That burden finances, and if even one EMI is missed, credit suffers. In addition, lifestyle spending does not add any real value to wealth. In tough times like Covid-19, maintaining lifestyle spending can be quite difficult when income is already under pressure.
Millennials can save that money, which could expand their corpus significantly in the long run. Cut out restaurants every weekend, avoid the urge to change your smartphone every six months, and make small lifestyle changes to save big money.
4. Buy health insurance
A medical emergency can wipe out some of your savings at once. Even a few days of hospitalization can result in billions of hundreds of rupees. However, this can be different with health insurance.
A health plan prevents personal contributions and ensures that funds are not scarce in order to receive the best possible treatment. For millennials in large cities, it is advisable to take out health insurance with an insured sum of at least INR 10 lakh. A family floater plan is ideal for keeping all family members safe.
In addition to buying regular health insurance, Millennials also need to look forward to getting serious illness insurance. Treatment for critical illnesses like stroke, kidney failure, liver transplant, etc. is quite high, and regular health insurance coverage may not be enough to cover all of the cost of treatment.
A critical illness policy, which provides a lump sum for the treatment of the illness regardless of the hospital costs, helps in such a scenario. Critical plans are fixed performance contracts, as opposed to regular plans that only reimburse actual hospital costs.
5. Don’t take on unnecessary debt
Taking on debt that is not required can often become a tight noose around the neck of borrowers. Not all debt is bad. Debt used to learn a new skill or buy an asset is good, but debt used for instant gratification could get millennials into trouble. It is not a good idea to swipe credit cards on every small purchase as the credit card interest rates are higher.
Paying only the minimum balance is also undesirable. Therefore, before entering into debt, Millennials need to analyze whether they need it or not. It is equally important to read the fine print on the loan documents to avoid surprises later.
Just like investing in stocks, millennials must take a long-term approach to saving. You should start your savings journey from the day you start making money so that you are on a solid financial footing and can handle ups and downs with ease.