From splurging on non-essentials to locking into illiquid assets, the list is long, says Uma Shashikant.
Last week the children’s friends visited us. These were young couples in their thirties. Still planning a family; excited about travel and the world; unwilling to lean on parents; and so on. When we began to talk about finances, their stories of financial regret came out one after another. That fodder was enough for this column.
We all make mistakes with our personal finances. But the common threads in these children’s lives were quite fascinating. These are children brought up in different cities, mostly by upper middle class parents. But they seem to have a similar set of regrets and future plans. Here is the list:
First, not taking the education loan seriously. All of them took education loans before they did post-graduation. The parents are guarantors on the loan. They enjoyed an initial moratorium and then the loans got due. But they were busy spending their new found salaries on themselves. They presumed the loans would just accumulate a nominal interest and that they would eventually pay. Until it began to affect their credit scores; or the parents were approached by the bank; or it became public knowledge that they were defaulters. They scrambled and managed to rework and pay. But they believe they could have avoided that.
Second, not bothering with the large bills and spends. One of them was overpaying on the electricity bill for years before complaining and fixing it; one was getting auto debited for subscriptions and updates on the credit card that he never used and did not bother to stop; one was spending every week on her hair and nails, and paid hefty salon bills, telling herself she deserved it; another was buying online almost every night; and another was routinely paying restaurant bills of friends. The sense that every rupee mattered took a long time to sink in. They severely regretted these careless spends and don’t identify with these anymore.
Third, not being concerned enough about the credit score. It was only when they needed a loan that they realized how callous they had been about the credit score. The unpaid education loans; the delayed personal loan EMIs; and the uber conservative use of the credit card all came to bite them. They realized that they had to build a credit history. One that showed they can take a loan and repay it. They continued to rib their debt-fearing friends for a poor credit score.
Fourth, saving too much in long term liquid assets. One of them maxed his 401K savings; another replicated that in India and contributed in VPF and PPF apart from the PF; and another only bought long term bonds. They all believed that if they stashed off their money in long term products with difficult withdrawal terms, they would be compulsory savers. Except they needed liquidity. For their short term needs. As youngsters they had many short term financial goals such as marriage, holidays, higher education and so on. Locking up money in illiquid assets was a bad idea. One of them had bought a flat in a city he then lived in, convinced that the EMI was a forced saving. He earns a paltry rent on a house he has never lived in.
Fifth, not having adequate insurance or the right kind of insurance. Some of them had Ulips on which they had no clue what amounts have been actually accumulated. Some had very small term policies. It was shocking to them when we discussed insurance as the back up until they built assets of their own. They had routinely dismissed the calculations their agents showed them as sales pitches. Insurance is the shield one needs before one can stabilize financially
and have enough wealth that can replace their incomes. Without that, the financial status remains precarious and severely exposed to risks of unknown events.
Sixth, not taking the time and effort to educate themselves about personal finance. Many even outsourced their simple and uncomplicated tax returns. They did not check their bank or credit card statements. They did not know what a TDS was and what a refund is. They thought time value of money is a theoretical construct and that diversification is a textbook concept. When they began to figure things out in their 30s they realised that the personal finance concepts and principles were simple and rather intuitive. It did not take too long to learn the basics; not was it too difficult to understand and implement.
Seventh, they did not discuss finances with their spouses early in their relationship. While they understood that attitudes towards money could be different, they chose the path of least resistance. Your money and my money; accounts were different; spending was different and no questions were asked. Now that they are planning a family and considering investing in a home, the need for ‘our money’ has arisen as a third category. They are still finding out what the others’ preferences and habits are; they still do not know how to make the rules both can follow. Not everything is pessimistic though. After all they have only just navigated the first 10 years of adulthood. There was enough-time to earn, save, invest and build wealth. When I said next 30 years, they unanimously stopped me. Who wants to work that long, they gasped. They plan to max their earnings and retire by the time they hit their 40s. They will live in a quiet place, close to nature, home school children, grow food and eat from their farms, and travel the world to experience more. Their plan was some version of this romanticism, give or take a few variants.
How would they fund it, I ask. We will have a corpus to generate some basic income to cover the essentials. We will engage in some income generating activity that will offer some buffer for indulgences and travel. We don’t plan to leave behind a big bequest; nor do we have the need for chunky assets, we just seek work-life balance, they declared. All of them are working 70-80 hours a week on the jobs they say they love but can’t keep doing for life. This front-ended finance model sounds interesting, I thought. But if 20 years is all there was for earning money, 10 years of making mistakes was costly I said, to sheepish agreement from all of them.
By Uma Shashikant (The writer is Chairperson, Centre for Investment Education and Learning) By ET CONTRIBUTORS | July 4,2021.