Wednesday, November 20, 2013

Financial planning: Why Generation Y needs it the most

Below is the edited transcript of Kartik Jhaveri's interview with CNBC-TV18

Q: Let us start with the basic question, what is financial planning?

A: People have various sorts of understanding about what financial planning is, but very simply put, it is like a little mathematical strategy, it deals with numbers. It tells you where you are standing today, what all do you want to achieve vis-à-vis what your possibilities are. To decide upon the amount of money you should put, you have to decide your goals and then someone can help you make a strategy by doing some calculations, some of them are simple but some of them are not so simple.

However when you put together you get a holistic picture and this picture tells you exactly how some of the futures are likely to pan out. So it is some sort of a road map. It is better to have a road map rather than not have anything and just doing things by instinct and by the hour or the prevailing season. It is a very good and a robust guideline.

Q: Most families especially a generation ago got by quite comfortably without financial planning, why do we need it now?

A: A lot of things have changed, let us not talk about a generation, let us talk about 15 years ago - PPF rates were 12 percent, the bond markets used to give us about 12-13 percent, corporate deposits, fixed deposits were pretty high. India was a different India at that time. We were not as progressive as we are today though whatever you might think of the economic environment and so on.

But what has happened is on one side needs have multiplied, the sources of income have gone up, but they have not multiplied in the same proportion.  There was a time we didn't have to spend Rs 1000 on mobile phone and an internet connection, but today the bear minimum anybody spends is Rs 1000. So there are new expenditures that have come in peoples lives.

Because fixed interest instruments gave a fixed rate of return and needs were smaller, inflation was under control and not as volatile as it is now, things were okay, our parents could happily manage their affairs. Even if you have a pensioner right now who is getting a super annulation, he is still making about 7-8 percent annuity. By the time you and I retire we will be at 2 percent and 3 percent that is what makes everything so much more complicated.

The need to beat inflation or to have inflation plus returns is so much more pronounced now than it was ever before. That is why there is this entire shift to doing something more scientific, doing something more organised, identifying where cash flows are going because needs are multiplying. Children need to do more things, we want to do more things, holidays, retirement, exposure, there is just so much more that we have on our agenda which is why the need for doing something more scientific.

Q: How early does financial planning start?

A: Going by the general wisdom if you can start it as soon as you start earning, well and good. But otherwise often I tell people that you start and people have a lot of aspirations that they want to fulfill so we say well okay two-three years do what you want but the latest time by which you should start planning is about the time you want to have a family. Ideally if you start by the time you get married, great.

Even if you have not done by the time you are married, if you are planning to have a child, may be a year before that from the time you conceive the thought that you want to have a child, may be that is a great starting point. However if you then delay then you are actually of course playing with time.

Q: Now when one starts their earliest job you are saying that is a good idea, it is wise to start financial planning but you have a lot of aspirations, you want a nice car, you want to hangout with friends, you want international holidays, may be you want to buy a house in your hometown but you don't really know where to begin and how much to allocate and whether you would want all those goals say three years from today. So how do you start saving money without really knowing that it is a goal, it is an aspiration at the moment not an agenda.

A: To people who are really young say early 20's, mid 20's that is the segment that we are talking about, so what we advise this section of people is play with your aspirations, fulfill them, do what you have to, buy a car, go for international holiday, do what you have to but in addition to what you are doing try and at least put away 20 percent of your money. We are not thinking of a goal.

Now if you like a fixed deposit do that, if you like a recurring deposit, do it. If you like gold, do it. If you like a mutual fund SIP and if you don't mind little bit of volatility, just have patience and do that. So whatever it is just get into the habit of putting away some money aside. What will happen is in three-five years you will be pleasantly surprised that you have got a few lakhs behind you.

Once you have your family and responsibilities come up on you, you feel so much better prepared to take on those responsibilities because you have got a backup and you have seen the results and the benefit. Even if you don't make too much of money, let us say a fixed deposit gives you 8 percent, so even if you have not made so much, it is okay because you know at least you have got these Rs 5 lakh behind me. It gives you a sense of fulfillment, a backup that if something really bad were to happen I have got money. I don't have to think about how I will feed my family in next six months if I lose a job. That is where this sort of a thing really plays out in the early years.

Q: The first thought that comes to ones mind is whatever money you are making , what percentage of that should you target as a saving or a purpose, something that you are putting away for a rainy day.

A: Normally I'll advise 20-25 percent. Of course if you are earning more and if you can do more, superb. The whole idea is as soon as you get your salary that hits your account, if you can just take a fifth of that and put it aside and then do whatever you want to do in the early years because you have still not decided what goals you want to have. You want to buy a house, sure, but where will you buy the house, is it sensible that you will buy a house. You might be living in Kolkata, you come for a job to Delhi why would you want to buy a house in Chennai.

Is there utility in doing what you want to do. So by the time you crystallize on all these thoughts, you may as well just put away some 20-25 percent money aside. If you want to learn more about it may be do two-three assets, don't do too much of complicated stuff, don't buy complex insurance policies, buy a simple health insurance, life insurance and just do your investment, buy gold, buy SIP or whatever you want. Get into the habit of putting a fifth of your money aside.

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