Why Millennials Should Focus On Financial Planning at the Beginning of FY 2022-23

Millennials should create a financial plan to put their finances in place over the next 12 months. We are talking about a financial strategy to take care of your household budget, emergency needs, Insurance covers, and even an investment blueprint to keep financial worries at bay during your later years.

Millennials encounter a variety of challenges that previous generations did not. When compared to their parents or grandparents, millennials have distinct financial habits, goals, and hurdles. Many have faced obstacles to balancing their long-term financial responsibilities and needs. Consider student loans, higher costs of living, especially in metropolitan cities, personal and professional aspirations that are constantly trending upward, and increased competition, all of which make securing a pay that fulfils one's lifestyle and demands all the more challenging. Millennials, who are between the ages from their mid-20s to early-40s, are now saving for their first homes, building businesses, and starting families.

However, most Millennials haven't reached their peak earning years yet, making overcoming these obstacles a comparative challenge. But there are clear signs of hope, including this generation's idealism. Millennials have been affected by unusual financial dynamics as a cohort, having lived through both the Great Recession and the economic impact of the COVID-19 pandemic during their peak working years.

Given that, millennials seem to have realised the importance of maintaining a healthy savings regime even as the external scenario remains uncertain and ever-changing. Many millennials will benefit even more than previous generations from learning how to set financial objectives, create an emergency fund, and moderate their spending. Those who start saving now have plenty of time to develop the assets they'll need later in life due to the long investment horizon.

There has never been a group of people who have had such an impact on the financial business as millennials. Millennials are the 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. The rise of personal finance apps, the uptake of digitisation by the millennials and Gen-Z, and lower entry barriers in terms of investment have all helped to democratise the personal finance business.

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Thus, it is important for millennials to create a robust financial plan at the beginning of the financial year 2022-23 to maintain a health financial future:

1. Set S.M.A.R.T Goals and Invest Accordingly

Depending on the kind of lifestyle you want to have, decide on your short-term, medium-term, and long-term goals. This will allow you to come up with separate investment buckets for the same and keep you at peace knowing that you have a plan that you're executing to get to reach your envisioned goals.

Goal-setting exercise is the first step in building a financial plan for long-term wealth creation. Whether you want to buy that first car in three years or go on an international trip five years down the road, allocating specified investments for these goals is a great way of planning for a wealthy future.

Your financial goals need to be S.M.A.R.T (Specific, Measurable, Adjustable, Realistic, and Time-bound). You need to ensure that the time horizon you set to achieve each goal is realistic and further prioritize them into short-term and long-term goals. If you initiate the habit of saving from your first pay-cheque, it will help you set your financial goals effectively.

2. Formulate a Budget

The first step towards increasing your savings is to formulate a budget plan. A budget plan acts as a roadmap for keeping track of expenses and filling in the gaps that lead to discretionary spending. A financial plan, on the other hand, does not have to be one-size-fits-all because what works for you might not work for everyone else.

Make your budget based on three variables: cash flows, liabilities, and financial objectives. Using simple and user-friendly budget apps is one method to do this. These apps can help you keep track of your income and expenses while also allowing you to save money.

Budgeting will assist you to save more and instil financial discipline; once you've started to save more, you can move on to investments in various rewarding avenues depending on your suitability. Ensure that you invest according to your goals and risk appetite after doing thorough research.

3. Be Prepared for Emergencies

In these times of uncertainty, due to various dynamic changes around the macroeconomic events, having an emergency fund to make ends meet is essential.

Keeping in mind the untoward incidents of the future, where, unfortunately, if there is a job loss or no source of income. As a general rule of thumb, you should always have at least enough amount set aside as an emergency fund to cover your expenses.

Ideally, an emergency fund must hold to at least 12-24 months of household expenditure, including loan EMIs. You may park such funds in ultra-short-term or liquid funds for quick access and tax-effective returns. Begin now to build a significant emergency cash cushion or safety net in case of a crisis. As soon as you get your first job, it is highly recommended that you start building an emergency fund. The sooner you get yourself prepared for rainy days, the stronger is your financial future.

4. Insurance Cover Is a Must

In the pre-pandemic period, until 2 years, India had an extremely low adoption of insurance products. Millennials don't take much interest in insurance products and deem them unnecessary, considering their youth. Whatever the reasoning, we have all found, how risky it can be to play the odds without being insured. Taking care of yourself and your loved ones in unforeseen circumstances is a necessity.

Not only does an adequate insurance cover indemnifies your risk to life and health, it 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, you may choose as per your suitability. As a millennial, you may first do careful research through available wide sources of information on the internet. Opt for family floater health insurance as it suits a young couple with kids. Get a life cover which is best met through a term insurance plan.

5. Diversify Your Investments

Your investment style will be determined by your risk appetite, which is unique to you. Risk appetite refers to how much risk a person is willing to take while investing; high-risk investments typically give big returns, while low-risk investments produce lower but more consistent returns over time. The investments you plan, make sure it aligns with your financial objectives.

Millennials have immense options to invest their money, speaking of avenues, mutual fund investment is a great way by which millennials can start their journey to wealth creation. Diversifying your investment portfolio can sound scary, but it's nothing complicated. If you've ever heard the phrase "don't put all your eggs in one basket," you're already familiar with the concept of portfolio diversification. As mentioned, there are different risks associated with different avenues of investment. You may consider investing in mutual funds to achieve your envisioned long-term financial goals. Investing through the route of Systematic Investment Planning (SIP) provides you with the benefit of rupee cost averaging.

In order to offset the risk you're taking by investing in mutual funds that are market-linked, you should simultaneously invest in something with lower risk but a steady rate of return, such as debt instruments and tax-saving instruments like ELSS.

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. Pay off Your Debt Burden

You need to ensure that you are spending within your limits and not borrowing excessively. If you create a debt burden, it will end up making you live pay check-to-pay check. In case you are holding any existing debts, such as student loan or personal loan, try to pay them off as early as possible and have a good credit score, which will help in times of emergency loan requirements in the future.

Millennials tend to rely on credit cards and loans to deal with financial shortfalls, as it looks like an easy option to manage any financial difficulty. At the same time, millennials, to fulfil a short-term experience, are willing to take loans with higher interest rates, which can escalate into a debt burden.

You need to maintain a balanced debt-to-income ratio of less than 40% and take concrete steps to reduce existing debt. Pay more than the minimum on credit cards (avoid using them frequently) and other high-interest rate debt as soon as possible. The sooner you eliminate such debt, the sooner you can put your money towards saving and investments.

7. No! It's Not Early for a Retirement Plan

Millennials appear to view retirement planning as too early for them and postpone it until later in life. One of the primary goals of financial planning is to plan for retirement. Your current savings, investments, and financial actions will have a direct impact on the type of retirement you will have.

You'll put less burden on your budget later in your career if you start investing in long-term goals like retirement sooner. Those who start setting aside a portion of their pay-cheque for retirement in their 20s are usually on track. If you start later, you'll almost certainly need to boost that proportion to keep up.

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 critical to save as much as you can in your early years, invest in schemes that are specifically designed to help you during your retirement years, such as the National Pension Scheme or the Post Office Monthly Income Scheme, and pursue other slightly more lucrative avenues to continue to generate and build your wealth for your golden years.

With the current challenging environment, millennials have already realised that they need to take control of their finances. We live in an era where we all have unprecedented access to information as well as the tools we need to understand and leverage our financial resources. We've come a long way, from cost management apps on smartphones to platforms that allow you to trade in the stock market without going through a middleman; now, it's up to you to make the most of your money and guarantee your financial future.

Financial planning enables you to reach life's milestones, which are indicators of success and financial security. Once you have a roadmap for your financial plan ready and have put your finances in place from next year, it will merely be an exercise to review and act only on the diversions and any new liabilities that may have arisen during the previous 12 months.

As a result, it is critical for millennials to develop a financial strategy at the beginning of the financial year. Having a strategy in place strengthens your finances, allowing you to weather any unforeseen events in the years ahead and to make optimum use of the opportunities that the market provides.

On the contrary, the biggest factor amongst millennials being unable to plan their finances is the sheer lack of financial education that has led to delayed and experimental forays into savings, investments, and financial planning.

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Warm Regards,
Mitali Dhoke
Jr. Research Analyst