Millennials are struggling between investment and consumption: Here's why

Mumbai-based Shanya Gupta, 26, loves to travel and shop. She goes on short trips every month and splurges a good part of her income on these excursions. She bought a car recently with a loan of Rs500,000.  She believes it is too early for her to begin to save for her future. 

While it would  be wrong to tar every millennial — those aged between 18 and 35 — with the same brush, it is also true that a number of them are more concerned with living the good life rather than saving and investing for the future. While people in this age bracket do not earn as much those in the forties and fifties, they have time on their side. A good start to their financial lives now can help them meet their goals comfortably, while a poor start can put them at a severe disadvantage. 

Confusing investing strategies: Something common with the millennials Business Standard spoke to is the do-it-yourself attitude. For example, Bengaluru-based Anubhav Raj, 29, invests around 10-15 per cent of his salary in stocks. On the other hand, Delhi-based Priya Gupta, 28, saves 25 per cent of her salary which she invests in fixed and recurring deposits since she doesn't understand stocks and mutual funds. These are two extreme investors. 

Amar Pandit, chief financial adviser, Founder, HappynessFactory feels that many dabble in stocks taking inspiration from friends and colleagues. “Those who do not understand stocks and mutual funds put their savings in Public Provident Fund (PPF), fixed deposits (FDs), and costly insurance products like traditional plans,” adds Pandit. The problem with such instruments is their returns. The post-tax return from bank FDs, for instance, fails to beat inflation. “Debt funds and fixed maturity plans (FMPs) are better alternatives than FDs since they are more tax efficient once the investment horizon goes over three years,” says Tanwir Alam, founder, Finkart. 

In the case of those who start investing when in their first job, Do-it-Yourself (DIY) investing often results in costly mistakes. “Many millennials err either on the side of extreme aggression or extreme conservatism when investing by themselves. They also suffer because of lack of experience in handling high volatility,” says Hemant Rustagi, chief executive officer, Wiseinvest Advisors. 

Instead of investing directly in equities, which requires experience and a lot of monitoring, they should stick to equity mutual funds, which are well diversified and have a fund manager to take care of the investment process. “Even if millennials make small contributions to mutual funds, the power of compounding over long periods will ensure that they end up with a large corpus,” says Rustagi. For shorter-term goals like accumulating money for a higher education course, millennials should invest in debt funds, while for longer-term goals like retirement  they should opt for diversified equity funds. 

And then, the consumption bug bites them: According to a study titled “Trend-setting Millennials: Redefining the Consumer Story” by Deloitte and Retailers Association of India, around 33 per cent of the monthly income of millennials is spent on entertainment and eating out, 21 per cent on apparels, and more than 11 per cent on electronics. Many millennials do not believe in saving and investing. “Many of them do not plan. They don’t even see the need to plan. They believe in living for the moment. For them spending is more important than saving,” says Pandit. 

Many millennials believe that they have enough time to plan for long-term goals, hence they do not worry about goals such as retirement. Experts say that many people realise late, on reaching their forties that they need to save more and regularly. “The golden rule is to start investing early. Starting even a year in advance can leave you richer by a few millions in case of goals that are two-three decades away,” says Pandit.

Quick to get into debt trap: Many millennials get mired in a debt trap because they have binged on credit card debt and personal loans. They need to clear their debts before they begin to save and invest. 

“Earning a 10-12 per cent return is of no use if you are paying interest of 16-36 per cent on your debt,” says Mumbai-based financial planner Pankaaj Maalde. They need to consolidate their loans and shift them to a lower-cost loan. For instance, credit card debt should be shifted to a personal loan. 

Millennials need to put a small amount, equivalent to three to six months' salary, in FDs or liquid funds to create an emergency fund, which can help them tide over short-term financial difficulties. 

Big commitment early on can spell trouble: While Shanya has already bought a car, Priya plans to use her savings for down-payment of a house. But is it a good time to take a huge liability? “Committing too much money towards buying a house at an early stage can make you compromise on other long-term goals,” says Rustagi. A house should only be bought for self-residence. “In the current scenario, buying a property for investment does not make financial sense,” adds Pandit. 

Finally, millennials should take guidance from a professional financial advisor, so that they are able to avoid costly financial mistakes.