Have you ever had an open and honest conversation with your son or daughter about money?
If not, then this Father’s Day can be a good start.
Here are some practical and simple suggestions you can give your children to help them manage their money better. We will explore three different areas of your kid’s relationship with money - Saving, Spending & Investing. I am leaving out another important area - Earnings, as it's beyond the scope of this article. But this is something that you should definitely include in your discussion.
While spend-less-save-more is boring but it is the most important starting point for building long-term wealth. Unfortunately, in the current times, this has become incredibly difficult to follow.
With ever-increasing desires inspired by social media feeds, peer pressure, clever marketing, reducing friction to buy anything, every shop now available on your phone, e-commerce apps, food delivery apps, subscriptions, instant loans, credit cards, buy now pay later, etc it has become easier to spend money than to save it!
Also from a behavioral standpoint, it's very difficult to prioritize the future vs now. Say you decide to buy a nice phone for ₹70,000. Compare this with saving the same ₹70,000 for your retirement. Retirement looks a long time away and you have no idea what that even means at this juncture.
Given the above context, if you were to leave the savings part to be manually done every month where you decide to spend first and save the remaining amount, there is a high likelihood that you will fail or not save enough.
A better and more practical approach is to start saving first before you spend and to automate your savings behavior. Target to save atleast 20%-30% of your monthly salary. The moment your salary hits your account, make sure in the next 2 days, your savings are automatically debited from your savings bank account and invested appropriately.
Mentally tell yourself that you will live with 70-80% of your salary and adjust your lifestyle accordingly. If you want to upgrade your lifestyle, then you need to focus on increasing your earnings rather than taking the easy way out by lowering your savings.
READ MORE: How can you build a corpus for your child’s higher studies?
While saving is important, it's equally important that you don’t overdo this. Spending well on activities and kinds of stuff that provide you with joy and long-term fulfillment is equally important.
Once you are done with your investments (read as to where your 20-30% savings goes into) and fixed expenses (like rent, groceries, electricity, petrol, internet, etc) your remaining amount is your “happy to spend” amount.
You can transfer this to a separate savings bank account so that you are not anchored to the entire monthly salary but the actual amount that you can spend.
From this account, here is a simple approach to figuring out where to spend your money.
Personal finance blogger Ramit Sethi has an interesting approach where he recommends you to - “Spend extravagantly on the things you love and cut costs mercilessly on the things you don’t”.
Broadly the idea is to identify areas that really matter to you and areas that don’t matter to you much. Act a little rich and extravagant when it comes to spending on areas that matter to you and become a value-conscious discount buyer when it comes to areas that don’t matter to you.
Some of the common areas that Ramit has identified are 1) Travel 2) Health/Fitness 3) Convenience 4) Luxury 5) Convenience 6) Experiences 7) Self-Improvement 8) Relationship 9) Freedom 10) Social Status etc. You are free to customize your own list.
Once you decided on your priority areas, don’t let anyone tell you you’re wasting money when you’re spending on the things that matter to you. You have earned it and it's your right to spend on living your rich life your way!
READ MORE: What are the best child investment plans in India?
You can use a simple 3-box approach to invest the 20-30% of your monthly salary that you had planned to save every month.
Box 1: Safety Box
- Build a job-loss fund (i.e an emergency fund) that can cover 3-6 months of your living expenses. Start a SIP for 5% of your take-home salary into a safe liquid fund and gradually build this out over the next few years.
- Buy Term Insurance if you have family members (spouse, kids, parents etc) who are dependent on your salary
- Buy Health Insurance for you and your family
Box 2: Short Term Box
- This will cover all your major money goals over the next 5 years. Eg Buying a Car, Vacation, etc
- Start a SIP for 5%-10% of your take-home salary into a safe high credit quality, low duration debt fund and gradually build this out over the next few years.
Box 3: Long Term Growth Box
- This is your long-term growth box where your money will grow at reasonable returns over long periods of time to help you reach financial freedom
- Start a SIP for the remaining amount i.e 10%-20% of your take-home salary into a good mix of equity diversified funds and gradually build this out over a long period of time.
This can serve as a good starting point to build a healthy relationship with money and can help you save more, spend consciously, and invest wisely.
Mr. Arun Kumar, Head of Research, FundsIndia