Date : 05 May 2017

Young adults are perhaps the richest among all of us. They have something more - “time”, an age when the possibilities are unlimited. In case you are a young adult in 20s or 30s or a parent / guardian with children approaching or are in their 20s, this article is for you. The article guides us to do a few things which perhaps no one has ever told us to do. These things will introduce you to the world of finance and when taken, will be your first steps to the world of finance...

Why Take These Steps?

There is one common thing which most people after the age of 35 regret. That common regret is about not knowing about investments and saving at a young age. To be financially successful, being skilled and knowledgeable is not enough. You need to have the right wealth management skills to be rich. It can amplify or magnify your income many times over. Hence, while you should focus on learning and pursuing your career dreams, you should also focus on increasing your 'wealth quotient'. The earlier you take the jump, the chances of becoming wealthier soon, increases. Being in your teens or in your 20's is the best time to take the steps listed here...

The First Steps:

1. Learn about Personal Finance & Investing

Knowledge about personal finance topics and investing at an early age is a great asset. Young adults must know about different asset classes, investment products, insurance, loans & credit, time value of money, inflation, savings, taxation, financial planning, etc. Such knowledge, especially during early years of career can really help someone take great decisions for future. If you are a guardian, be sure to involve the young adults in your own investment decisions. There are many ways in which young adults can gain financial knowledge. Some of them are...

• Read books, finance magazines and watch TV shows on investments

• Interact with financial advisors, accountants, experienced family members

• Attend investment seminars/camps by regulators, participants in financial services industry

• Enroll for any certification from the many offered by NSE/BSE on the subject matter

2. Get Engaged:

Your parents must already be investing and interacting with their accountants and financial advisors. We encourage you too to participate in learning and understanding the decisions, your parents are making. You may ask them about what financial savings are being done for your future. You may also enquire about insurance coverages, etc. taken for all family members and whether those are accurate. As savvy internet users, you may also share your feedback and suggestions to your parents in their wealth management activities. We are confident that with the kind of access to information you have, you can surely start adding great value to family financial matters.

3. Control your spendings

Young adults are perhaps the most valued consumers hunted by every big brand ranging from cars to shoes to laptops to even holiday packages. With the newly gained earning power and lack of big responsibilities, it is natural that spendings on entertainment, gadgets, accessories, hanging out / parties, etc. form a big chunk of the spendings. Surely it is the time to enjoy life but young adults are advised to control their urge to splurge and not make impulsive decisions. It would be great if one can budget such spendings and avoid taking big decisions like buying motorbikes, cars, laptops, etc. without adequate thinking and research.

4. Start investing immediately:

We have often spoken on this topic. The benefit of saving early can never be under estimated. Even if the savings is small, with the power of compounding, the wealth created by you can be enormous, as seen from the following matrix.

In the above e.g., Mr. Delay would have to invest thrice the amount, or R 3,000 monthly, saved by Mr. Smart if he wants to match the wealth created by him at age 35.

5. Get PAN & start filing tax returns:

PAN card can be issued to any person, irrespective of whether there is any earning or not. And, if you have started earning, it is best to start preparing & filing income tax returns (ITR), unless exempted. Filling of ITR has many advantages as it is considered as a standard income proof globally and can help you while applying for loans, visa applications for jobs abroad, requesting tax refunds, etc. The PAN issued by IT authority is a prerequisite for filing ITR and is also mandatory for all financial transactions. So it makes sense to get yourself one, even if you don't have much income.

6. Get health & life cover

Getting adequate protection at a young age, where people tend to be more adventurous, is highly advised, even if there aren't any dependants on you. Buying health or life cover at a younger age is also considerably cheaper than buying the same later. Such protection can really help one, in case there is any unforeseen emergency and financial burden on parents will be avoided.

7. Start thinking about home

The average age of home & car buyers has decreased dramatically in the last 20 years. Powered by easy availability of loans, fat pay packages & growing aspirations, the first time home buyer today is often around the age of 30. The first time car buyers are even younger. It would thus be best advised that young adults keep these goals in mind and start saving as much as possible for home & car goals, if any, from now onwards. It would really benefit you a lot when the time comes for purchase in near future. Often young adults delay saving for the goal and end up paying lesser down-payments and taking higher amount of loans which should be avoided. Lastly, even if you have a house of your own, it is advisable to think of buying a house as an investment for future and also enjoy tax benefits on same.

Conclusion:

Having time on your side is a great advantage and never to be missed. It is also the time that you can afford to make mistakes while learning - this is a luxury which most people cannot afford at the later years of their lives. Experience has shown that wise decisions, actions and discipline in these formative years go a long way in securing a better financial future down the line. Simple actions taken today can help you avoid taking tough decisions at times when you have a family to support and lot of responsibilities to be taken care of. So go ahead and make the best of this time.

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Ashish went to a nice restaurant for dinner with his 4 colleagues six months back. They had a fun evening and the bill for the dinner came to Rs 12,000, which was split between 5 of them. Manish paid the bill and the others had to transfer their share to Manish's account. Everyone paid, excepting Rakesh, he forgot to transfer the money.

Today, Rakesh walks up to Ashish's desk and says, "Hey, I just realized I forgot to bring my wallet, can you lend me 1,000 rupees?" And suddenly Ashish goes into a flashback and recollects that dinner and Rakesh not paying his share. Ashish, with a fake smile, unwantingly stretches his hand to reach his wallet kept in his trouser pocket. He opens the wallet, with the unbroken fake smile, he sees that he has around Rs 5000 cash, but decides to lie to his friend and says, "Sorry Manish, I just have a 100 rupee note in my wallet". Rakesh to Ashish, "No problem Ashish, I'll ask someone else" and he left.

Why did Ashish choose to not help his friend?

Because of lack of credibility

You would not want to risk your money by lending it to someone who is not credible, because there is a likelihood of him defaulting again.

This was an everyday scenario. However, when it comes to the organised sector and if you want a loan, you must make sure you don't have a credibility issue. Because you might not even get a fake smile here, and the bankers won't even pretend to stretch their hands to reach their lockers.

Banks will decide whether to give you a loan or not, on the basis of your ability to pay. And they gauge your ability to pay through your CIBIL score.

What is a CIBIL score?
TransUnion CIBIL Limited, collects and maintains credit records of individuals on the basis of their loans and credit cards holding and repayment history. These records are used to create credit scores, which are provided to banks and other credit institutions in order to help them evaluate and approve loan applications.

The CIBIL score ranges from 300 to 900. Higher the score, the better. Ideally you should have a CIBIL score of above 750 to increase the chances of your loan application getting approved.

If a person is in urgent need of money, the worst thing that can happen to him is a bad CIBIL score. It is mandatory for banks to review a loan applicant's CIBIL score among other checks.

Having a good CIBIL score will not only help you get loans easily, but also you'll be eligible for higher loan amounts, lower interest rates on loans, longer duration of loans, etc. To avail these benefits, you must maintain a good CIBIL score.

How do I maintain a good CIBIL score?
Check your Credit report. The first step is checking if you have a low CIBIL score or not. If you have a low score, then you have to get it right. You shall:

• Pay off your credit card debt and any unpaid loans.
• Pay your EMIs on time.
• Reduce the number of loans and credit cards you apply for.
• If your credit card or loan application is rejected, do not apply for it again immediately.
• If you notice any errors in your report, you must appeal for its rectification on the CIBIL website.
• You must not exhaust your credit card limits. Ideally, you shall use 30-40% of your credit limit each month.
• Use the oldest credit card, the one which you have been managing well and have a timely repayment history. Get rid of others.
• Do not be card hungry. If there are 6 different banks offering you credit cards. Do not take all of them as you do not need them.
• Maintain an optimum balance between your secured loans (Eg. A home loan) and unsecured loans (Eg. car loan).

The above points will help you increase and maintain your CIBIL score. Even if today you have a good CIBIL score, keep the above points in mind as a small mistake can bring bring your score down. A high CIBIL score will help you get those loans easily and on better terms and conditions.

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Warren Buffet, one of the greatest investors of the world, the Chairman and CEO of Berkshire Hathaway, in his annual letter to the shareholders, presents investment insights, which are eagerly awaited by investors all over the globe. The annual letter to Berkshire Hathaway's shareholders 2016, was recently released. It encompasses Berkshire's performance, it's operating units, the American economy and the most looked forward to, pearls of wisdom from the investment guru. Out of the 28 pager annual letter, we have brought to you the key elements, which are particularly relevant in the Indian Investing context:

He says

“We’ve experienced both outcomes: As is the case in marriage, business acquisitions often deliver surprises after the “I do’s.” I’ve made some dumb purchases, paying far too much for the economic goodwill of companies we acquired. That later led to goodwill write-offs and to consequent reductions in Berkshire’s book value.”

Our view

When you buy stocks of companies, you pay for its fundamentals, it's past performance, it's future outlook, and for its brand value or Goodwill. The goodwill increases the PE multiple of the stock, which means you are paying a higher price for a given level of earnings. Purchasing a stock at a higher PE is not wrong as it may be high because it has good growth prospects, but it may be inflated because of higher goodwill. Hence you must be very cautious as this goodwill may fade away with time, bringing down the value of the stock. So, when you take a decision, don't just look at the name, rather focus on the fundamentals and the future prospects of the stock.

He says

Charlie Munger, Berkshire’s Vice Chairman and my partner, and I expect Berkshire’s

normalized earning power per share to increase every year. Actual earnings, of course, will sometimes decline because of periodic weakness in the U.S. economy. In addition, insurance mega-catastrophes or other industry-specific events may occasionally reduce earnings at Berkshire, even when most American businesses are doing well.

Our View

Be positive and have conviction in your investment. Your investment might sway due to periodic macro economic factors like the economics of the country or turbulence in the industry, but in the long term you'll have a positive average annual growth rate.

He says

Charlie and I have no magic plan to add earnings except to dream big and to be prepared mentally and financially to act fast when opportunities present themselves. Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.

Our view

Buy Low and Sell High is the simple formula for profiting. But the tendency of the investors is the other way round. They invest when the markets are bullish and panic and sell when the markets start falling. So, eventually they are buying high and selling low = Loss. Wise are those who see a fall in the markets as an opportunity, you get to invest in good companies at lower prices. Investors should invest in market downturn because when the market starts accelerating, and your investment takes the upturn, your gains would be soaring.

He says

You need not be an economist to understand how well our system has worked. Just look around you.

See the 75 million owner-occupied homes, the bountiful farmland, the 260 million vehicles, the hyper-productive factories, the great medical centers, the talent-filled universities, you name it – they all represent a net gain for Americans from the barren lands, primitive structures and meager output of 1776. Starting from scratch, America has amassed wealth totaling $90 trillion.

Our view

Believe in your country. India is the fastest growing economy in the world. Just look around, see the tall buildings, the flyovers, the new cars on the roads, the airplanes flying in the Indian sky, look at your own house, how you grew from a 2bhk to a 3bhk, from a Bajaj Super to a Swift Dzire. We are growing each day, it is an opportunity that we are living in a growing country, so it makes sense to invest when the graph is moving upwards, help the country grow further and relish the rewards from its advancement.

He says

Moreover, the years ahead will occasionally deliver major market declines – even panics –

that will affect virtually all stocks. No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media.…....... During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.

Our View

The markets have historically declined and risen again, and the only certainty is they will fall again and rise again. But no one can tell you when. The news analysts will advise you to sell your stocks during a slump, there will be panic. During such times, be calm. When there is panic around, consider it as an opportunity. When others sell, you get to buy at cheaper prices, and you'll be the one benefiting amid all the tension. If you panic, you'll be essentially contributing to your loss and an intelligent investor's gain.

So, the above were the important ideas, among many, extracted from Warren Buffet's Annual Letter 2016. Let's consider these insights as pious sermons of investing and incorporate them in our investing demeanor. Happy Investing!

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