Samuel Gompers was a veteran trade union leader in the US. He was interviewed by a journalist, who asked him “Mr. Gompers, you have been a trade union leader for decades. What exactly does labour want?” Samuel Gompers replied “More.”

When it comes to money, this sums up everybody’s aim. Unless we are born with the proverbial silver spoon, we must achieve this aim ourselves.

Starting early is the most important step

Young adults need to understand that it is imperative to start saving and investing the moment they start earning or even before that from their pocket money. The head start that you get by starting in your late teens or early twenties (as opposed to late 20s or early 30s like most people) will keep you ahead of the curve throughout your life.

‘Save for a rainy day’. We have heard this adage a million times. Well, how about saving to ensure continuous sunshine?

Most people think that savings and investments are meant for responsibilities that will come much later in life – children’s education, their marriage, your retirement, medical expenses, etc.

• But what about your own marriage? Wouldn’t you want to help your parents with the expenses?
• What about the annual holidays your family will want to take? Would you want your savings targets or investment commitments to come in the way of that or vice versa?
• What if at some point you (or your spouse) want to or need to take a career break? Wouldn’t it be nice to have something saved up?
• And it’s strange that when we mention children’s education, we generally mean higher education. But has anyone noticed how expensive primary education has become? Do you want to be in a situation where your child’s current education needs eat into your future commitments?

It’s actually very simple

Your income utilization is divided into three portions:

• Non-discretionary spending: your unavoidable expenses: Rent, electricity bill, food, etc (your responsibilities)
• Discretionary Spending: Movies, eating out, holidays, etc.
• Savings: What is left over after spending.

When you start working your responsibilities are the lowest. So, a large portion of your income can be saved and invested. However, most people do not even start thinking about investment either because they don’t think it is necessary or because they think they do not earn much so the savings will be insignificant. The focus at this stage is enjoying the newfound financial freedom. But remember, every penny counts. Any sum that you invest, no matter how insignificant it may seem, will take you a step closer to financial security.

As you get older, your responsibilities increase and you realize that you need to start saving and investing but, after meeting all your commitments, you may or may not be able to do so.

Starting to save and invest the moment you start earning has multiple advantages

• It will inculcate the habit from the beginning which will help you to manage your finances better in future.
• When you first start investing, you are bound to make some mistakes – some wrong investment choices. When you are younger, you can afford to make these mistakes and learn from them.  
• By the time the responsibilities start piling on, you will already have a nice little kitty saved up. This will continue to grow even if you are sometimes unable to add to it.

Let’s look at the flip side: You have been working for 5-7 years, have enjoyed yourself, are used to a certain lifestyle but have not saved anything. You are now married or about to get married. You realize your responsibilities and decide to start saving. You make a target for yourself – an X amount every month or every year. But what happens at this stage is that your expenses have also suddenly shot up. Your non-discretionary spending increases very sharply. So the percentage of your income that can be divided between discretionary spending and savings reduces. You land up in a situation where you have to choose between maintaining your current lifestyle and securing your future. This unpleasant scenario is completely preventable.

Take an interest in your finances

A lot of young people find the subject of their own finances boring. But what’s boring about creating wealth, being financially secure, maintaining and improving your lifestyle over the years? 

• Keep tabs on how much you earn and what you do with it.
• Save as much as possible. In fact, first save, and then spend. 
• Most companies allow their employees to structure their own salary. Take this activity very seriously. Structure your salary in a manner which gives you maximum tax benefits. Money saved is money earned.
• Invest your savings in a manner that maximizes the returns while managing risk. Make investment decisions yourself. Take advice but study alternatives and let the final decision be yours.

Invest your savings wisely

Money does not grow on trees. And it doesn’t grow much lying around in your Savings Account either. Just saving regularly is not enough. You must make your money work for you.

Your asset allocation can be broadly divided into debt and equity. The thumb rule is 100 minus your age in Equity and the rest in debt. So if you are 20, 80% equity and 20% debt. But this can differ depending on your comfort and degree of involvement with equity.

Debt: These are your safe investments. The capital is protected, and returns are fixed. The aim here should be to get the highest possible returns. Bank FDs are popular because of the safety that they provide. But as the interest is taxable the net returns are very low. If you park your money in FDs you will very rarely beat inflation. Stick to tax saving instruments like EPF (Employees’ Provident Fund), PPF (Public Provident Fund), Infrastructure Bonds and any other Government Bonds with Tax benefits.

Equity (My favourite!): I could write several volumes on the merits of equity investment (and a couple on the perils). But in a nutshell, if you can take care of the risk, the returns will take care of themselves - and very good care of you. Just keep it simple. Don’t be too adventurous. Trading tips from your local or online broker do not constitute equity investment. If equities interest you, do your own study and create a diversified portfolio of stocks you would be comfortable holding for life. If not, do a simple SIP in a 2-3 diversified mutual fund schemes. Even an index fund will do just fine.

Initially, you will have to work for your investments. But later your investments will work for you. The longer you hold them, the harder they will work! All you need to do is give them time. So, START EARLY.