Currently, one of the major factors drawing global attention to India as a key emerging market is our young population: According to 2011 census, nearly 50% of our population is below 25 years of age. Typically, today's youth are interested in leading a fast life, spending big and making quick gains. Few are averse to spending most of their income to follow a trendy lifestyle. To generate quick returns, they often do not realize the risk involved in investments such as equity derivatives, commodities trading, etc. However, it is important they learn early on in their life about the importance of saving and spending wisely.

Early bird

The first and foremost rule is to start early. For example, Rs 1,555 saved every month from the age of 25 would return Rs 1 cr when you are 60, assuming a portfolio return of 12% (See table below). However, a delayed start is likely to lead to higher outflows to achieve the same target. A 5-year delay almost doubles the monthly saving requirement from Rs 1,555 to Rs 2,861. This more than triples to Rs 5,322 if the start is delayed by 10 years.

Power of compounding

By starting early, you can also benefit from the power of compounding. For example, Rs 1,000 saved every month for 10 years will return Rs 2.30 lakh (Rs 1.20 lakh principal) assuming a 12% annualized portfolio return. If this is continued for another 10 years, the total amount accumulated would be Rs 9.89 lakh (Rs 2.40 lakh as principal). This may go up further if one increases the monthly saving by 5-10% every year. The above example shows that the second decade has given higher absolute returns – almost four times more – than the first because of the power of compounding as even the reinvested amount has generated returns. Thus money grows at a faster rate as duration of staying invested increases.

Way forward

To spend and save wisely, one can follow a 5-step financial planning process: t Risk profiling: Knowing one's risk appetite t Analyzing goals t Allocating funds across asset classes such as equity, debt and gold t Portfolio selection, and t Portfolio tracking.

A key component of maximizing wealth is asset allocation. So do not put your money only in one asset class, thereby losing the opportunity to benefit from another asset class. When one invests in different asset classes, the risk gets diversified, since all the asset classes seldom move in the same direction at the same time.

Today's youth should not also worry that to save for the future, you need to sacrifice the current lifestyle and spending. Even a small amount saved in the right manner can ensure big savings over the long run. One of the popular and effective means could be systematic investment plans (SIP) from mutual fund houses through which you can invest a small amount – as low as Rs 500 – to build a large corpus over the long run. For instance, a saving of Rs 500 monthly for 24 months @10% growth would give around Rs 35,000 at the end of the period. So if you are thinking of buying a costly gadget, say a laptop or an iPad, a car or a house, you can plan accordingly and save the required sum. With an early start and regular savings you may even be able to buy the dream car or house a few years earlier than anticipated.

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