Gen Y retirement planning mistakes
All over the world the mistakes by young people seem to be the same. Hang on, we are all guilty of the same mistakes. Since we made the mistakes, we are requesting, pleading, with you guys not to make the same mistakes. I am calling those born post 1984 as Gen Y and these are the mistakes that I see (believe me some of them are very focused and may be doing well – well not as well as Mark zuckerberg but yes on the way to good finances). If you have seen the Bloomberg figures, it takes about 300 years income to buy a luxury flat in Mumbai. So damn it, let us ignore that !! Here are my observations:
1. Ignoring compounding: Time value of money is the most important thing in saving and investing. Every blog, speaker, writer has screamed about this. The best way to tap into this is to start saving / investing early. As early as possible. Make a start today. Do a SIP in an ELSS fund and do it from today to the rest of your life. Do not interrupt the process of compounding. If the fund in which you are investing is not doing well, start a SIP in a second fund, but do a sip in an ELSS FUND, now. http://www.subramoney.com/2008/07/start-investing-today/
2. Ignoring the power of youth: It is in your young age that you can travel the seas and look for a job in Dubai, Singapore, USA. Remember the power of earning more and therefore saving / investing more. Resistance to change means people do not want to travel for work. It is so bad that boys and girls look for a job near their house even at an young age of 30. This is so sad. On the other hand I do see some young girls willing to travel 30km everyday because they get a better paying / better learning job. There is a huge difference between getting a Rs. 18L job in Vashi (because you are staying in Kharghar) and getting a Rs. 25 lakh rupee job in Andheri. Yes you have to travel, unless you are willing to ask your family to shift house. For heavens sake, do not be geographically handicapped.
3. Most of you understand that Income MINUS Expenses = Savings. You need to change this a bit. Income MINUS Money allotted for all your goals = is available for current spending. This means you pay yourself first. You pay for your retirement, your home buying, your children’s education, your life insurance, medical insurance, etc. and then the money that is left is used for current expenditure. This forces you to learn a little about patience. Also delays the gratification. Some of you do it very well and some of you do not. Pushing all of you to do it. That is all. http://www.subramoney.com/2013/12/pay-yourself-first-means-what/
4. Listening to parents about investing: This is one of the worst crimes that some of you do. Especially true if your parents are the PPF, LIC, bank FD types of savers. The generation born in the 1950s and 60s ‘saved’ for their retirement. You cannot afford that luxury. You need to ‘invest’. So you will have to be in equities for your long term goals. So if you are investing Rs. 150,000 per annum for your 80C requirements, my suggestion is Rs. 10,000 towards term insurance, Rs. 10,000 towards PPF and Rs. 130,000 towards ELSS. In case you have a contributory provident fund, say Rs. 40,000 per year, then 10k term insurance, Rs. 1k ppf, and Rs. 79,ooo in ELSS. Maximize your exposure to equity, and do it fast. http://www.subramoney.com/2015/05/when-saving-is-better-than-investing/
also read this http://www.subramoney.com/2012/04/papa-ko-bolo/
Many of these kids do live frugally, and cutting costs is really great – savings are faster and investing that money is great. However what will really create wealth for you is geographical mobility to earn more, frugal living and investing in equity. This triumvirate is what is going to create wealth for you. All 3 are equally important.
Akshay Sharma
I’m not exactly agree with point 2, yes you should strive to earn more but it shouldn’t be at the cost of your health and family. Travelling in India 30+30Km daily is really not a great idea. You’ll spend unnecessary time in traffic which you can well spend with your family or for yourself. You can read new books, play with your kids. Money is important but it should not be everything that you spend your young age in earning and saving only.
lakshminarasimman
sir one more point i think this generation is suffering more peer pressure than any other
almost every house one fellow is foreign return so there is big race to see who has best phone camera house car wife/husband kids and put it on facebook
MRHDK2012
Agree with Subra. Economic prosperity it directly related to mobilty. This is true all over the world and across generations. History will tell you this.
Unless you are born in a metro or a big city, you have to be ready to move. Young folks constrained by location will always miss opportunities.
Also, families with large real estate/ land holdings will be unable to move and will fall behind in next generation.
You can see around what happens to families after 25-30 years when they don’t go out as they have to take care of family properties.
Vivek Hingorani
I am amazed as to how can u write so much on same fundamentals but with different examples. U have a great art of writing. I am ready to invest. Do reply to my mails.
Arun Jayant
Subraji,
If I relocate to the US or any other country for that matter, say for a decade, can I invest my savings in Mutual Funds in India? What are the pros and cons? What should I keep in mind, if I were to do this?
Also, should an Indian national who has gone abroad for work, invest their earnings from that country, in that particular country itself, or in India?
Of course, there’s probably no generic answer, however your insights will help me, as always.
Sendhil, PenguWIN
Subra Sir,
One more mistake that young investors (GEN Y) make is trying to buy a house at the earliest thereby paying a huge amount as Salary as EMI. While I am not against purchasing a house for living, the problem is it affects your capacity to invest in other assets like Equity which can create more wealth in the longer time frame. Also, at an early age you are not really sure if your are going to settle down in the same place and if you decide to relocate then the investment becomes a problem (managing the house remotely, rental yields being low etc). Also, the needs change a lot as age progress and you might think that a 2 bed house is sufficient at an age of 25 depending on your salary which could change a lot after marriage and having a couple of kids in which case you need to move to another house by mid 30’s.
IamNoSpecial
@Arun Jayant:
Till the time Subra comments, please check this:
1. No, if you are in US, then you cannot invest in Indian Mutual Funds. Google – FATCA
2. It all depends on how long you want to stay there. Say for 10 years, you can consider an index fund in US. If your travel is for very short duration like 1 year or so, better come back and then invest in India. Till then you have options like NRE FDs
Vaibhav
I’ve lived 38kms away from my office in the past and I’m living 1 km away from my office currently. Trust me, long commuting is the bane of modern life which causes more suffering than any other malady that urban has brought upon us.
Worth spending a little extra to stay close to work.
Arun Jayant
@Viren Phansalkar,
Thank you!
Wonder what the policy is like if you’re an Indian national working in Europe or the Gulf for that matter.
Your second point got me thinking. Had someone stayed in the US during 2013-14 and come to India in 2015, they’d have missed investing their earnings during 2013-14 in Indian MFs. And this is when the Sensex went up!
So, this means, its not enough that you earn well after relocating abroad. You also should know where to invest that money, and what investment avenues will no longer be available to you, because you’re now an NRI!
subra
I agree with I am no special – do not invest in India if u are planning a Green card / citizenship and filing tax returns in that country. They want so much data that Indian fund houses also do not like the money from there. Stick to Nre fd.
subra
AJ
missing one bull run / selling before on bear run should normally not impact a 50 year investment cycle.
Learning about investing is the best investment that you can do. Super ROI on financial learning
MRHDK2012
Iamnospecial,
Please check your information. Indian citizens living in USA can very well invest in Indian mutual funds. The exceptions are the mutual funds sponsored by US entities e.g. Franklin DSP Blackrock, etc. SEC regulations discourage them.
FATCA doesn’t provibit US residents (including nationals of other countries) from investing overseas. They only insist that you declare all your investments through FBAR and include income from those investments while filing tax returns. I know many Indians living in USA and investing in HDFC, ICICI funds.
Sanny
MRHDK2012,
You are wrong in when you say many Indians living in USA have been investing in HDFC and ICICI funds. HDFC discontinued SIP’s last year and does not allow investment from US based NRI’s.
MRHDK2012
Sanny,
I will check with them. My cousin has been in USA for past 7-8 years in 2 different stints. When he did KYC, he was in India so his KYC status is Resident Indian.He regularly buys directly by HDFC website.He doesn’t have SIPs.He has been filing taxes in both the countries through experienced CA/CPAs. Eventually he will return to India.
I know several such people.
I will ask them about the points listed above.
Ravi
MRHDK – if your brother has NRI status in India and Resident Alien Status in USA. He can not invest in Indian Mutual funds, it’s simply not allowed if you let your Indian Banks and Fund Houses know about your change of Status.
It’s not only FACTA, google PFIC rules(Passive foreign investment company), Mutual Funds in India or any other country outside USA are impacted by this rule.
Subra Sir – Excellent article, i am 31, but have lived in 6 cities (2 in USA) in last 10 years. I am very Happy about the move! Basically never lived in Mumbai since i started working :).
Manju
Hi Subra and Others,
I am in the USA on a work visa for last one year and have been actively investing in Mutual Funds based in India (ICICI, Birla Sun Life, Franklin and HDFC. This process has been smooth as I have a direct account, so no issues with the brokerage.
I am not planning on selling them anytime soon as they are for long term investment, so Long Term Capital Tax is ruled out, hence I do not have to declare these while filing my Indian Tax.
So Indians in USA can invest in MF’s however needs to take care of tax consideration.
Nishanth
Manju,
Similar situation to yours.For sure , Indians living in the US can invest.However , have you declared your NRI status to these MFs and did they allow you to invest after that ?
If you have been out of India for the last one year and intending to continue the same , then you would have to declared your NRI status.Upon changing your status, very few Indian MFs will accept investments from you because they dont want to go through the whole FATCA paperwork mess.
This is the situation for now.However , I predict in 2-3 years , we will see a far more reasonable state of affairs where Indians based in US can invest in Indian MFs without any hassle.
In the meantime if you still wish to have exposure to the Indian markets . there are verious feeder mutual funds based in the US
ajayrajaram
IRS and Indian I-T : come in..come in..do you copy ?
10-20 subramoney.com 7201 in progress. over.
Ankur Lakhia
I am sure once you declare that you are US resident, Indian MFs will not allow you to continue SIP due to FATCA compliance requirements. However, there are alternatives like India specific ETFs listed on NYSE.