This article was first published on LiveMint.
In today’s world, irrespective of where you might be, you need a way to financially reach your aspirations. Goal-led investing is just the recipe one needs
Big Spenders’ is a stereotype that the millennial generation is often associated with. However, it is interesting to note that saving behaviour is in the genes of the young aspirational Indians. According to one survey of about 3,900 individuals, professionals in the 25-40 years age group across the country save about 31% of their income on an average. However, the reality of their life is that their savings are never enough to meet their aspirations. The age old wisdom of buying real estate and gold and parking money in fixed deposits is passé for the young Indian of today. What has changed more profoundly is the aspirations she is saving for. Rather than classical Indian investment objectives like retirement, child’s education or marriage, today’s younger lot is focusing on goals like world travel, cars, interesting experiences and other lifestyle goals.
This coincides with the increasing awareness around investing. As a result, these are increasingly becoming the new age investment objectives. Over the past decade, driven by convergence in content consumption, there has been an exposure to an aspirational life. The millennial generation has the desire and the mental makeup to go for these aspirations.
What really excites them is their next international holiday or next big car instead of just accumulating for their old age or their kids. The clear desire is to live rich and not die in affluence. The behaviour shows a lot of variance though—from buying the first car to aiming for the dream BMW, or from a simple weekend getaway to an exotic vacation abroad.
This is not to say that this generation is not looking beyond the next 6 months. The goals progressively change with age, increase in family size and earning power. In the early professional years, the focus is more on lifestyle or experiences and the primary goals are travel, experiences and gifting. The most common long-term goal during this stage is funding for further education. Lately, start-up fund is also becoming a need that drives saving behaviour.
As they get married, the goals change a little on the quality of experiences, more exotic vacations, buying the first car and buying their home. With the growth in family, the outlook starts becoming a little longer around children’s education. Retirement as a goal becomes evocative only around the age of 40. While the desire is to retire early, the plan for that desire is missing.
Meet A, who is investing just about Rs4,000 a month for a Rs2.6 lakh-Europe vacation in about 4 years. That’s the power of goal-based investing. It’s like getting a vacation in the Maldives at the price of Goa. B wants to save enough to buy jewellery for her engagement. For this, she is putting away Rs1,200 a month to buy jewellery worth a lakh 5 years from now. She will save up just Rs72,000 to get Rs1 lakh. C has been investing towards his goal of funding his entrepreneurial dream, for the past 2 years.
An interesting trend among working professionals from the IT industry across Bengaluru, Pune, Hyderabad and other major cities is investing in the goal of self-education—planning the finances for a study sabbatical so that they can retool their careers.
Systematic and regular investments can bring their dreams closer to reality. Interestingly, this is not a metro only phenomenon. An increasing number of people from Tier 2 and 3 cities like Lucknow, Nasik, and Jodhpur are investing towards goals like emergency fund, annual vacations, children’s education and buying a vehicle.
Looking at our data, young independent women are not far behind. About 30% of them are invested towards the goal of a dream vacation, with the average monthly invested amount being 21% higher than that seen in case of average male investors. Clearly, this is an encouraging sign among women who invest. The ratio of women investing, however, lags their participation in the workforce.
There are both behavioural and financial reasons for investing led by goals. The ability of people to associate outcomes to percentages is generally poor. About 83% are not comfortable with compounding. An even higher number gets confounded by tax, risk, and other such factors. A good goal-based investing plan needs to consider the impact of inflation as well, allowing one to not only plan what the future requirements could be but also how much is needed to invest today to achieve that. It saves one from under-saving. It builds discipline, especially for those new to investing. Since a ‘goal’ is a real outcome, chances are high that one will adhere to the discipline of investing to achieve it. Daniel Kahneman ascribed the sobriquet of ‘Affect Heuristic’ to this.
It is evident that young Indians are aspirational, and want to consume the best. Traditional savings or credit instruments are not enough for them to realize their aspirations. In today’s world, irrespective of where you might be, you need a way to financially reach your aspirations. Goal-led investing is just the recipe one needs.