Financial advisors and coaches drilled power of compounding charts into us, to emphasise the importance of starting saving and investment plans early in life. Warren Buffet’s oft-repeated quote is about power of compounding being the eighth wonder of the world. It is erroneously attributed to Einstein as well, just proving the popularity of the concept.
The importance cannot be over-emphasised, yet it did not appeal at a certain age. One wants to save money to buy a house or car, foreign education or a foreign holiday. The idea of saving, but not withdrawing from the corpus to spend felt impractical.
Several decades down the line, we are corona-wise, like no other generation has been before. And it includes all generations. The middle aged are reviewing and revising retirement plans. The old are struggling to meet healthcare costs. Consequently, the millennials need to learn not to depend on older generations.
I summarise the major shifts that have taken place in the last few years.
1. Shift of focus from children’s weddings to retirement
The young are not in a hurry to get married or settle down in other traditional ways. They are exploring life and options till 35 or so. Gone are the days when parents planned completion of their child’s education and wedding, before they retired.
Parents have tweaked priorities and put retirement planning higher than weddings on the priority list. They plan for higher education of children, though, at least till post-graduate level.
They would not like to be financially dependent on children in their old age, so work at becoming self-sufficient.
The millennials need to acknowledge this shift, and start saving for career breaks and fancy weddings. Support from parents may not be forthcoming.
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2. Women forced to quit jobs during Covid19
Women have been forced to quit careers and jobs in the last one year, to do justice to their parenting and caregiving roles. Domestic help disappeared. One does not feel secure about leaving a child in a creche where protection from infections is not guaranteed.
The loss of one income leads to revision in financial planning for the future. Home loan EMIs need to be restructured. Personal loans and car loans need to be settled faster, to become as debt-free as possible. One needs new household gadgets to manage housekeeping without hired help.
It is unexpected as of now. But it need not always be so.
Millennials need to save for such exigencies, and learn to manage with less money, should one be compelled to do so.
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3. Retirement planning high on the agenda
It’s not just early retirement, but the uncertainty of career breaks and moonlighting lifestyles that one needs to be prepared for.
Remember the lessons in Business Economics that said fixed costs need to be low, for higher profitability. The same applies to personal financial planning.
If fixed costs are high like EMIs on home and car loans, one needs to have a Plan B. No harm in having a Plan C if Plan B fails to take off for some reason. Changes in the macro-economic environment cannot be predicted. Insurance planning and back-up plans are the key to risk management.
Dream away, millennials, but earn, save and invest. Doorways to success and fulfilment of dreams will keep opening.
And don’t underestimate the power of compounding, if all rules are followed.
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