First Job? Start Investing! Financial Planning at the start of your career…

Old age, death, retirement, are all very far away in life. Life is fun. You have just started earning, why should you start financial planning? And for heavens sake at the age of 23!? Well read on. Most 23 year olds are different.

Most of them have financial needs that differ materially from those of the rest of the population.

I know of one mother who has decided to make her son repay all the ‘extravagant expenses’ that he had during his college life. Making kids pay is quite un-Indian and not a regular feature in most of the relationships that I know of.

To that end, I have spoken to these kids in a generic manner and I thought I would list what makes these kids tick and must recognise the fact that the advice and services targeted toward this younger crowd might not be rewarded with an immediate meaningful commission. However it is nice to catch them young and plan a life long relationship. ?

Many demands on their liquidity

Most of us recommend that these investors sock away cash in a formal retirement plan in the early years in the hope that the accumulated savings will grow into a big round sum when the investor reaches retirement age. This is sound advice.

But given the aggression of advisors and bank relationship managers, this advice is taken to some ridiculous heights. However, these advisors must also be aware that not all investors can save money in their early years.

In addition, younger investors often need to maintain a certain level of cash so that they can purchase items such as a car, or pay a down payment on their dream homes.

Also at such a young age committing too much money into a ‘locked-in’ scheme may not make much sense, because these kids will need money to buy a car, a down payment for a house, marriage, etc.

Hence it is necessary to keep some money liquid (free) and not earmarked to any investment.This means that sometimes the best advice that an investment professional can give is for the investor to keep her/his funds in a money market mutual fund, or some other short term investment vehicle that won’t lose value.

By definition, this may also mean that the advisor or broker might not draw a sensible commission. However it is necessary to see what the investor wishes to do with some of her/his money. Hence for this class PPF, Unit linked Pension plans etc may not be suitable — at least not for a big portion of their investments.

Risk tolerance

As investment advisors are taught that the younger an investor is, the more aggressive they should be with their investments. However, this is too generic.

A young investor who is supporting a dependant family in the absence of a parent is very different from a young investor whose parents are both holding highly paid jobs or a young investor whose parents have a lot of ancestral wealth.

Also, some investors aren’t aggressive investors by nature. They simply don’t have a high risk tolerance, even if they have a higher net worth, and can afford to lose more than their peers. Advisors should realise that ‘ability’ to take risk could be different from ‘wanting’ to take risks.

Therefore, advisors need to realise that their first objective is to make sure the investor’s needs and desires are being met. This may mean forgoing the strategies that your boss may be pushing on you. It may also mean investing in asset classes drawing a smaller commission.

Supporting the family

As a result of an aging population, many young people are being forced to provide (food, clothing, shelter, health care) for their parents or grandparents. This may mean some money of theirs should also be in liquid funds to meet emergencies.

Alternatively, they may need or prefer to allocate a large portion of their investments to debt funds in order to obtain a steady stream of income and to satisfy ongoing living arrangements for their elders.Putting in so much of effort and realising that the young client is not capable of investing money in equity funds (which is what all advisors seem to be selling in a rising market) and thus the opportunity to make money is not really on and can be frustrating.

Insurance needs

Younger investors typically overlook their need for life, disability and medical insurance. They also overlook the fact that the best time to buy insurance is when they are young,?when the premiums are relatively inexpensive.

One reason of young investors not looking at insurance very kindly is perhaps the over aggressive sales pitch by a typical insurance salesperson. This may be putting off potential investors. However, if the young investor is one on whom his parents have spent money for education and this amount is a significant portion of their parents’ investment, they need to look at insurance.

If the young investor has taken a loan, supports a family, is planning to get married, s/he surely needs life insurance.

The discipline factor

Not all young investors are able to put away money each month for retirement. However, it is vital for us to instill some sense of urgency in their investors and train them to save at least some portion of their monthly pay, and then to put that savings into a retirement account such as a Pension Plan or PPF.

Far too often, advisors are focused on their larger investors, and fail to look for the Rs 3,000 -cheque their younger investors send in on a monthly basis to be added to their accounts. Employers / advisors/ brokers need to make certain that their investors follow through and consistently add to their investments.

  • This can be easily achieved by recommending that they set up a SIP system, in which the funds are automatically added to their accounts each month.

Bottom Line

The assumption that all younger investors should be aggressive with their investments, or should automatically fund their retirement plans to the maximum isn’t always correct. Younger investors have many needs and goals that must be properly exposed to all the options. And once you have made the investment keep track of your net-worth by visiting and getting the software to track your net-worth as well as file your tax return.

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