- Date : 14/02/2020
- Read: 6 mins
It’s never too early to learn about money and financial independence. Have you started teaching your kids all they need to know?
If you ever bought a piggy bank for your child and encouraged them to save, you have started them on their financial journey. Saving, planning, and being independent are core values that are best inculcated right from childhood.
As your children grow older, it is your duty to steer them towards the path of smart money management. Teaching financial planning is as important as providing the best education and helping your children build the right career.
Different is as different does
As Gen Xers, you work and save – that ethos has been culturally instilled in you by your parents. But your philosophy, methods, and life goals (both short- and long-term) could be very different from theirs. And this phenomenon is likely to repeat when your own children start making their way in the world.
If times are changing, the way optimal savings are done cannot remain static. Buying gold jewellery and a house were considered the best way to safeguard your future some years ago. But does that still hold true today? Not only do you have to teach your kids to plan for a stable future, you also have to impart the correct advice in sync with today’s economic conditions.
Changes in household savings patterns
Historically, household savings in India have been risk-averse, investing in safe tools such as fixed deposits and the aforementioned gold and property. However, in recent times, there have been some crucial structural changes in savings patterns.
The popularity of systematic investment plans (SIPs) amongst retail investors has grown exponentially. SIPs remove the temptation to watch markets, and react to its ups and downs. AMFI data shows that SIPs accounted for Rs 4269 crore worth of investment in April 2017, as compared to Rs 980 crore per month in 2012, signalling a trend towards higher domestic savings in financial assets amongst Generation X as well as millennials.
There are newer avenues of investment, such as mutual funds, insurance products, and ETFs that should hold your attention. Not only are they safe, they also yield a higher return on investments as compared with fixed deposits. As parents, you need to arm yourself with knowledge about these products so you can teach your children about them.
The financial behaviour of millennials
Let’s look at how your kids are using their money and how you can influence them. Traditional milestones such as getting married, buying a home and car, having children, saving for their education, and retirement planning are important to 2 out of every 3 millennials, but they postpone saving towards these ends.
Unlike with previous generations, the ‘sharing economy’ provides the services needed without millennials having to take on the financial burden of ownership. So instead of burying themselves in debt, millennials are either delaying them until later in life when they have enough money, or they are just not worried about it.
A 2015 study by ICICI Lombard found that Indian millennials spend 69% of their total monthly income.
Financial tips parents can impart to millennials
As a parent, you need to understand your children’s spending habits and guide them so they can manoeuvre through life as easily as possible. The key lies in impressing upon them the fact that the earlier they start saving, the more they will benefit from the power of compounding. Explain to them the benefit of investing in equity-focused instruments while they have fewer responsibilities to worry about.
Here’s a blueprint you can follow for lessons on financial planning: teach your children how they can grow money, build a safety net, save tax, and gain financial freedom – to live life as their hearts desire.
Invest for safety – The importance of saving money for a rainy day is apparent to you. Here are some good savings instruments for risk-averse millennials to meet financial goals and save for emergencies:
- Fixed Deposits (FDs)
- Recurring Deposits (RDs)
- National Savings Certificates (NSCs)
Invest to save tax – Millennials are known to borrow and spend heavily. Most of their money is spent on paying EMIs or settling credit card debt. Tax savings options include:
- Employee Provident Fund (EPF)
- Equity-Linked Savings Schemes (ELSS)
- Infrastructure bonds
- Term insurance (and invest the money ‘saved’ in an ELSS)
- Paying off an education loan (the interest is tax-deductible)
- Invest in equity – The younger you are, the more likely you are to be a risk-taker. Equity schemes are a great option for those who have a higher-than-average appetite for risk.
Equity-linked Mutual Funds
- Stocks (but only if you stay vested for the long-term)
An interesting feature in the different outlooks to investment philosophy is the period of staying vested; 57.3% of retail investors in India stay vested for more than two years. The comparable figure for Gen Y is 94% – akin to pushing against an open door.
Keep retirement in mind – The importance of saving towards a distant future should also be emphasised. The power of compounding will make what might seem a small amount today multiply exponentially in 30 years.
Invest in gold – Investing in this precious metal can still be attractive to your children as a hedge against inflation, and as part of a balanced savings portfolio. There are a number of avenues available, many of which don’t rely on the physical purchase of gold.
- Exchange Traded Funds (ETFs)
- Fund of Funds (FoFs)
- Gold Monetisation Scheme
- Gold Accumulation Plan (GAP)
As parents, your role is to advise and guide. With age, increased responsibilities, and life’s own lessons, everyone’s behaviour changes. Let your own path show your children the way.