Shikha has just landed her first job after her graduation. She plans to work for a few years before going back to college to get a management or doctoral degree overseas. Shikha has been advised that her chances of getting into a good management school will improve with work experience, while allowing her to save for her higher education. She likes to spend, but is also keen to save for her future. Her upper middle class parents lead a comfortable life, but are not wealthy enough to fully fund her education. They have told her that allocating a large sum for her will compromise their other goals, but they will help her as much as they can. Shikha is tempted to leave home and fend for herself now that she is employed and has an independent income. She, however, does not have a large enough salary to live on her own and also save for her future. She likes her financial independence, but wants to be sure that she gets her basics right in her money matters. What should she do?
Shikha’s key goal is to fund her higher education. She has to first ascertain whether her saving would cover the costs. She should assume a conservative rate of return (bank deposit rates) from her investments in which she will deploy her savings. She can seek a bank loan for the balance amount. She should choose her management school with a good placement record, so she can repay the loan without difficulty. Shikha’s focus should be on increasing her own savings, so that her loan amount is lower to that extent and repayment is not a problem.
Since her parents are willing to support her routine needs, Shikha should use this to increase her monthly savings. If rent, food, health, transport and such routine costs are met by her parents while she works, Shikha will have a higher savings rate. She should not move out on an emotional impulse, as that would increase her expenses and reduce her ability to save significantly. Her parents may be willing to see this arrangement as much better compared to funding a large sum for her higher education. They may also be willing to guarantee her education loan, instead of funding her directly.
Since Shikha knows that she will need an education loan in the future, she should work on building a good relationship with her bank. She should ensure that she builds her deposits and investments are operated through one bank account, and should keep a clean record. She should avoid a credit card at this time, and not take personal loans. If she takes a loan, for example, to buy herself a bike, she should repay it on time and have a good credit record. Since what is not saved ends up being spent, Shikha should begin a systematic investment plan that debits her account towards investment, even before she has money to spend.
(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)