Millennials do not worry as long as they are confident that their net worth is outpacing the cost of borrowing
The joy of interacting with young working people is the ease with which they traverse from one thing to another. I was amazed at the dexterity demonstrated by these two youngsters at the airport a few days ago, when I was awaiting the boarding call for my flight. They were both on their laptops, headphone in their ears and mobile phones intermittently replying to calls from workplace on a presentation or a project. One of them was also attacking a burger which was precariously resting on his thigh. I feared it would fall and his meal would be gone, but he was a pro at balancing.
But, it was a different call that one of them received that made me refocus on them a bit longer – the call seemed to be from a lender, who wanted to know about a pending payment. The boy got up dropping his headphone and cussing, before looking for a quiet corner for this rather unpleasant call. Within minutes he was back, but his swagger was gone and he genuinely looked troubled after the call.
More money to spend
The newfound joy among youngsters is to spend more and save less. In fact, it would be borrow more, pay less and then stare at a credit trap. I don’t wish to sound archaic in my thoughts; I am very much for spending and borrowing, as long as there is clarity on the need for the spend and if one could actually afford it. Those who are conservative would paint this boy’s situation as one that is the beginning of the end and a picturesque scenario of turning into bankruptcy. Those who are progressive and risk—takers would allay all fears and label this economic freedom to spend and a rising confidence to earn more in the future.
I have gone about the savings, spending and earnings equation in the past. But, in the case of people who borrow, as long as the borrowing is within their means and manageable; there is nothing wrong. So, in their case, if there is fewer saving in the bank, but more assets to show as built – it would be a positive wealth effect.
Where do they spend?
Household spend happens in four broad categories—acquisition of financial assets like equities, insurance, pension, mutual funds and deposits; acquisition of physical assets like land, property and gold; acquisition of durables like bikes, holidays, car, phones, and other consumer goods; and pure spend on consumables like grocery, clothes, movies and travel. Depending on which way you see, the same financial action could be seen as spending or investment. For instance, educating children could be seen as expense, but it could also be classified as investment in their future.
Go for appreciation
Go in for borrowing, if the value of what you buy appreciates. So, borrowing to buy a house is good, but borrowing to travel is not. When you borrow to buy a house, you are servicing the loan, but you are also building an asset, which will appreciate in value with time. Borrowing is not a cause of panic, as long as you earn more money than what you use to service repaying the loan. Yes, between financial assets and physical assets, the former provide a higher potential for appreciation in value, and a higher level of flexibility to fund unexpected expenditure. Physical assets provide the stable, but slower appreciation in value to be able to cushion risks from financial assets.
Now, about 3 per cent of Indian households have financial assets in equity and mutual funds, which offer scope for capital appreciation. It is extremely heartening to note the increase in the number of new investors in mutual funds and equities in recent years. Are youngsters investing in equities? The answer is not clear and it is something that some of colleagues are exploring through a survey. If you are under 30, I suggest you participate and help us understand you better.
The takeaways for me from interacting with Millennials are to not just learning about being more tech savvy, but to understand their financial behaviour. Sadly, at the one hand they have adopted to changing technologies and trends pretty fast, but when it comes to making a financial choice, they have not risk takers and mostly find merit in traditional way of financial savings and investments. Those who tell me they fear investing because of the chances of losing money are fooling themselves. The risk of finding oneself in a debt trap is much worse—rather than look at equity markets with fear.