Generation ‘Y’ commonly known as the ‘millennials’ face the maximum risk of retiring bankrupt. Saddled with student debt, no job security despite having redundant jobs, low pay, and the constant need to up-skill, Millennials face a larger chance to go out of the job market before anyone does. This brings the pressing need for millennials to start working towards saving money for their future.
A Millennial in their 20s should focus on investing at-least 50% and 40% in the mid-30s of their monthly income respectively. According to conservative estimates, saving in the 20s accounts for 53% of the total savings pool a man can create in his entire lifetime. A saving made in the 20s would be compounded for the next 40 years continuously, hence accounting for the largest share of the savings pool.
Hence, 50% of the salary to be earmarked as savings is strongly recommended. While compounding does its job (and over-glamorised at times), savings is an underrated skill. You can never expect a 50% return on Rs. 100 savings, rather you can expect a 10% return on Rs. 500 savings. That’s the power of savings.
The remaining 50% (20% for wants and 30% for needs) is the actual spending potential of the person’s monthly income.
Putting 10% of your earmarked savings in Pension schemes is advisable. Take, for example, the National Pension Scheme run by the central government in India. In this scheme, you get tax benefits twice – once while you are earmarking funds for it and a second time when you are redeeming it. 60% of NPS is purely tax-free available at lump sum at your retirement age. NPS balances the investment exposure into debt, equity, and alternate investment, hence making it the best bet for pension planning.
The next 20% of your earmarked savings is advised to be parked into insurance (term plans & health insurance plans). This would help you plan future uncertainties and secure your premium for a lifetime. Taking a cover in the 20s is strongly advised to lock long-term inflation-prone premium expenses.
The next 30% of your earmarked savings is advised to be invested in mutual funds. Passive funds (which mirror the benchmark indexes) are the best bet. Active funds have AMC charges and haven’t been able to produce satisfactory returns vis-à-vis the loss incurred on returns. Selecting a fund of Top 50 or Top 100 companies in India with the lowest tracking error is the best way to secure your returns.
The next 20% of your allotted savings is advised to be put into fixed return instruments. They could be anything from debt funds or National Savings Certificate to Fixed Deposits or Recurring Deposits, which barely beat inflation but come very handy if the markets turn bearish in the future. With funds parked in NPS and Mutual Funds (both being market-linked), securing some returns in a bad economic scenario is advisable.
The last 20% of your savings can be parked in a liquid fund or blue-chip stocks. This fund is your emergency fund (which should at least be your 3 months’ salary) which could be used right away in case of any exigency. Parking them in liquid funds/blue-chip stocks ensures that this money is safe (at least in invested amounts).
To sum up, savings in an underrated concept. The power of compounding works well if you start early. Putting your savings only into one instrument (which looks/is lucrative today) is a risky proposition, something no financial advisor would recommend. It is advised that you take a risk-assessment test to finalise how much money would you park in each instrument but saving 40-50% of your monthly income should be non-negotiable. Earmarking a fixed savings pool every month brings fiscal discipline, something that comes a long way to stay away from retiring bankrupt.