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The Carefree Youth

Overcome the limitations at the beginning of your professional life & begin investing to benefit later…

Resources are small and the urge to save is weak: Except for a tiny minority, a starting salary doesn’t leave too much room for savings and investments. Compared to an earlier generation, newer lifestyles are not only more expensive but the social pressure to consume and spend is now much stronger. Psychologically, the urge to save always starts with some kind of future expense that one foresees. However, in one’s early or mid-twenties urgent financial needs are genuinely few. This means that relatively few young people get into the habit of saving.

Paradoxically, the two most common financial crises that young people face pushes them towards thinking of money. One is educational loans, which are getting increasingly common for professional educations. The other is consumer debt, most commonly in the form of credit cards. Probably, before saving anything, young people need to learn to stop desaving. That means that rule number zero (which comes before any other rule) is that credit card debt is financial poison.

The general approach during this phase of life should have two goals, in order of priority:
Cover for emergencies
Invest in long-term equities
Cover for emergencies takes two forms-savings and insurance. Insurance should take the form of term insurance and health cover. Neither is compulsory-it is entirely possible that you do not actually need either. For example, if your employer offers you adequate cover for health costs, then don’t waste money on health insurance. Similarly, if you don’t have any dependents, then there’s really no need for term insurance either.

Besides insurance, everyone needs a stash of cash for emergencies. This can be any amount that you feel you might realistically need-there’s no way we can guide you on that. The only rule is that this has to be genuinely accessible at any time. Therefore, it should be a combination of actual cash and a savings bank balance that can be withdrawn by debit card.

Once the emergencies are disposed off, one way or another, there’s nothing left for the young beginner to do except put all the rest in equity mutual funds for the long-term. However, the only rule is that you must not invest in a lump sum-SIPs are the way to go, but that’s something that we talk about elsewhere.
The main point about investing in this phase of life is the avoidance of gratuitous debt and learning to match the type of investment to the goals, for it will be sorely needed in the next stage.