On the subject of financial tips for young earners, a lot is commonly said. Most wisdom on this subject focuses on aspects like how much they should save, invest, pay as EMI, allocate to different asset classes and so on. While these aspects are important, there are other which are even more important. And they are often ignored in this discussion. So in today's post I am going to talk about these underrated aspects which are vital to the financial well being of young earners.
Take Risks To Maximise Income, Not Returns
Like most people today, young earners are most concerned about extracting the highest return possible from their portfolios. But returns are ultimately outside the scope of their control. Common sense dictates that emphasis must be laid on controlling the controllable variables in a process. Our income is the most important controllable variable in the process of money management. As our income increases, our ability to save and invest more also does (assuming our cost of living remains about the same).
Therefore young earners must look to leverage every available opportunity to increase their income and earning potential. This may be in the form of adding new skill sets, professional certifications or moving to a new job with a significant increase in income. Young earners have a lot more human capital to offer. Therefore focusing on increasing income at the cost of taking career risks would be more rewarding for young earners. This in turn reduces the need to take incremental investment risk to chase higher returns.
Learning Must Be Broad, Deep And Consistent
Constant learning is essential to successful money management. Awareness of a variety of aspects on a subject is typically seen as the mark of being knowledgeable on that subject. While knowledge on a variety of aspects is important, that alone is not enough. It would make one a jack of all trades, and a master of none.
Therefore broad knowledge of a variety of aspects should be combined with deep knowledge of some of those. Therefore depth of knowledge and consistency of learning becomes more important. Take a look at this quote from Bruce Lee as substantiation behind this statement.
Broad, deep and consistent learning would make help us gain more holistic perspectives on everything we learn. It allows us to combine working knowledge of multiple concepts with proficient knowledge on others. Young earners must look to gain full proficiency on the most important concepts of money management. This would make each of them a jack of all trades, but also a master of the most important ones.
Do Very Little, With A Lot Of Discipline
When young earners begin their investment journey, their enthusiasm would naturally be very high. They aim to try everything that they hear about. They aim to do everything they are told to from various sources. The enthusiasm to try and do multiple things is understandable. But when it comes to money management, enthusiasm affects focus and discipline. Focus and discipline are essential to successful money management.
Therefore the aim for young earners should be to do the bare minimum with a lot of focus and discipline. Focus and discipline are especially important when it comes to adopting an investment style. Broad knowledge of various investment styles can serve as a foundation. But young earners must ultimately zero in on one style and stick to it. An investor who follows a single style with discipline would achieve a lot more than someone who knows multiple styles but cannot stick to a single one.
Apart from the choice of investment style there are certain other requirements that young earners must have in during their initial years. These are laid out below.
Achieving this much over time is enough to give young earners a solid foundation. After that, all they would need to do is ensure that each of these requirements continue to remain in place. Beyond this there is not much that they would need to do. More exotic products and strategies can come into the picture at a later time in their lives and investment journey. This too would depend on their specific needs and preferences.
The Practice Of Money Management Is Completely Different From The Theory
Most information that is available about money management is completely theoretical. Young earners (like most other individuals) therefore develop an understanding of money management through theoretical information. But money management is an exercise that is completely practical. A theoretical understanding of a practical exercise is obviously incomplete.
Consider the following statement as an indicative example :
Large cap index funds, when held over 15-20 years have provided a return of 12-14% on average.
From a theoretical perspective, this implies that successful index investing is simply about holding index funds for 15-20 years. But the theoretical perspective ignores the impact of human psychology and behaviour. And these aspects are extremely important to consider. Let me explain.
Most young earners today haven't been tested against a major market crash and/or a prolonged bear market. Unless they face such a situation there is no way for them to realistically judge their temperament and appetite for risk. How well they maintain their rationality and discipline under such a situation is what actually defines how successful they will be with index funds (and equity as a whole).
This is something that can only be understood over time. No amount of theoretical knowledge can prepare young earners for this in advance. Young earners must therefore understand that it is practical knowledge that is the biggest difference maker in the context of money management. Practical knowledge can only be gained over a period of time. And what turns out to be true in practice may be completely different from what is said to be true in theory.
Talk Money Before Matrimony
When it comes preparing for marriage, most couples today talk about a variety of issues. Money is almost never one of them. There may be cursory discussions as to how much each partner earns and the relevance of merging finances. But care is seldom taken to check whether both partners share similar (if not identical) philosophies on money. Unsurprisingly, financial incompatibility is one of the leading causes for relationships not working out today.
Financial incompatibility between couples has nothing to do with how much money one partner makes versus the other. It is always down to each partner not agreeing with the other's philosophy on money. It is very rare for two people to have similar or identical philosophies on money. But an effort can be made by each partner to objectively the other's money philosophy.
Both partners could then agree upon a set of guidelines on money management. These guidelines would help govern the way both partners handle money post marriage. Both partners would thereby begin married life with a much more sound foundation. A simple way for couples to test their financial compatibility is set out in the graphic below. If both partners can come to a mutual understanding on these aspects, they mwy give marriage a serious thought.
Most of the aspects discussed today are relevant to most, if not all. But they are most relevant to young earners. This is because of the specific nuances that are inherent to the financial situation of most young earners. They would just be starting out on their financial journeys. Therefore they are likely to be a lot more open to learning and absorbing what they learn. They may also have made few money mistakes, if any. This would allow them to leverage the benefits of each guideline discussed above to the greatest extent.
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