By Shaji Kumar Devakar, Executive Director, IIFL Wealth
The theme for this international youth day is intergenerational solidarity. Austrian writer Marie von Ebner-Eschenbach once said, “In youth, we learn; in age we understand”.
Youth must imbibe experience and learnings from their older generations. A nation’s youth is the future of society and if they are to navigate the world, one of the first things they need to understand is money.
In keeping with the theme of intergenerational solidarity, here are five important wealth and investment aspects that the youth of today needs to know:
1. The importance of budgeting
One of the biggest lessons on wealth revolves around optimal budgeting and keeping a track of your spending habits.
While youth is a time filled with possibilities and fuelled by fearlessness, you must remember that emergencies have a way of creeping up on us when we least expect it.
When you start budgeting and tracking your expenses, you will be able to better understand your spending patterns and the ways in which you can set aside a sum to help you tide over rainy days.
2. Savings versus investing
Legendary investor Warren Buffett started investing from a very young age, and this worked in his favour due to the power of compounding.
Compounding refers to the scenario wherein the interest you earn from your investments creates additional earnings, making your wealth grow in an exponential manner.
Even as you save for emergency situations, you should also keep aside a certain amount for investing. There is a huge difference between saving and investing money – when you leave your money in a savings account, you end up receiving a small amount of interest, but, when you invest your money, you accumulate wealth for the longer term.
If you begin investing in your youth, you have the ability to take higher risks for stronger returns, and this puts you in an incredibly advantageous position.
Start investing as soon as possible and you will find it very easy to accomplish all your future financial goals –be it purchasing a vehicle or pursuing further education in a foreign institution. You can even retire early and travel the world in your prime, as long as you start investing early.
3. Avoiding the debt trap
Given the huge rise in the 'buy now pay later (BNPL) economy, chances are high that you already possess one or more credit cards and this is not a bad thing.
Having a credit card, and using it wisely, helps you develop a healthy credit score which will keep you in good stead when you consider applying for a loan. However, when using a credit card, it is important to remember that there is a difference between need and luxury.
If you are using your cards to spend beyond your means, you are setting yourself up for a vicious debt trap which can lead to terrible financial stress in the future.
Only buy the things you actually need and if you do wish to indulge in some luxury, then remember to save up for it first. Alternatively, if you do use your credit card, ensure timely repayment as this will help you avoid high-interest payments.
Stick to the repayment timeline as missing your scheduled payments can cause your credit score to drop.
4. Differentiate between assets and liabilities
Suppose your aunt, who is visiting from abroad, gives you a gift of ₹50,000 for Diwali.
What do you do with the money? Chances are that the first thought you have would be to spend the money on a gadget you have been chasing. However, remember that it is best to use your money on accumulating assets rather than liabilities.
While purchasing the gadget may offer you momentary happiness and satisfaction, it will not help you over the longer term. Alternatively, if you invest the money in a mutual fund or in a fundamentally strong stock, you will be able to grow the amount in a sustainable manner.
Understand the difference between assets and liabilities and strive to utilise your money on accumulating assets rather than splurging on things you don’t actually need.
5. The effort of earning money
As long as we live off our parents or guardians, we cannot understand the effort it takes to earn money. If you have been spending money without giving a thought to how it is earned, it is time to take a step back and reconsider your actions.
Youth is the time to take action and gain perspective – get an internship or volunteer for a cause to understand exactly how much effort is needed to earn money and you will see your outlook change.
Money is an important aspect of a person’s life and assimilating these lessons in your youth will help you create a strong foundation for your future.