You probably heard about the "urban poor" last week. You might have read the viral Buzzfeed article, which described these beleaguered-but-trendy youth. Indeed, it insists these millennials are poor because they have to stay hip and keep up appearances.
Or you might have stumbled upon some of the criticism of the piece. Like the essential guide to Urban Poverty Syndrome. Or this article, which points out that these people are simply not the urban poor. In fact, this one defines them instead as the urban stupid. You might also have remembered the 10 times life made you totally feel like an urban poor.
Even while laughing at all the hilarious Twitter responses, though, there might have been a tinge of recognition. Sure, you might not know marketing executives who sleep in the car they bought and the person who goes hungry just so they can eat at an overpriced French bakery might be getting just desserts.
But running out of money before the end of the month? Taking the metro instead of an Uber? Maxing out a credit card because of a rash buy? Having to ask the parents for a stop-gap loan that never gets repaid?
These aren't alien concepts even for those whose incomes on paper fall into the middle-to-high range according to Indian standards. These problems rarely have anything to do with networking or appearances. There's a simpler explanation that doesn't involve starving for Starbucks: Not poverty, just poor financial habits.
Upto 76% of Indian adults do not adequately understand key financial concepts, a Standard & Poor's Financial Services survey revealed last year. A survey by Visa in 2012 similarly concluded that only 35% of Indians are financially literate.
Lack of understandingAn Indian Institute of Ahmedabad survey in 2012, sponsored by the Citi Foundation, looked specifically at young professionals. It found that nearly one-third could not perform simple numerical tasks to calculate interest and had no meaningful understanding of inflation or diversification of investments.
"The performance on different dimensions suggests the real lack of understanding of the basic principles related to money in everyday life," the survey said. Worse, it also concluded that a large number of young professionals are not aware about even the most commonly available savings instruments. More than 20% didn't even know about fixed deposits, the most popular way to save in India, after savings accounts.
The self-reported portion of the survey found that most of these young employees anyhow think they are doing plenty of smart financial planning. But since they don't seem to be aware of basic financial concepts or of savings instruments available to them, the report concludes that they are likely falling back on traditional advice – which may be a problem.
"The current generation has to cope with defined contribution plans rather than the defined benefit plans that the earlier generation enjoyed. Rising longevity and increasing financial market volatility pose threats to retirement savings. The current generation is likely to face greater job insecurity and income uncertainty. Greater access to consumption credit and other liability products could alter financial behaviour over a period of time. The informal sources of financial advice that served the old generation reasonably well are unlikely to perform equally well in an age of nuclear and sub-nuclear families and an environment of increasing financial complexity."— IIM-A/Citi Foundation Survey of Financial Literacy
No budgets, no habits
Anecdotal – and personal – evidence suggests the same. Young Indians are familiar with the conservative old maxims, like keeping borrowing to a minimum and putting a little away every month. But few do any sort of budgeting every month and there is little awareness of where their money is going. Not planning expenditure means there is usually only a very small amount left over to save every month, and even that tends to sit in a savings account.
Added to this is the extended adolescence of twenties, with privileged, educated millennials not having to worry immediately about marriage or children until their late 20s or early 30s. All of this means that the core principles of financial planning – setting goals and creating habits – get ignored.
Not having to get married or save for a family usually means goals are often put off for some nebulous time in the future. And a certain amount of disposable income spent without any budgeting usually means no saving habit is cultivated.
The result is a class of relatively privileged youth who don't know how to convert their incomes into the wealth that their parents managed to accumulate. Lack of budgeting coupled with a consumerist economy and, yes, social and professional structures that put a premium on networking, combine to produce the sort of youngster who might max out their credit cards without realising that it's the same thing as borrowing money – exactly what their parents always told them to avoid.
Unless they have had the benefit of timely advice from a family member or a trustworthy friend, very few young professionals seem to be aware that savings instruments can start small. Recurring deposits, which pull a certain amount from your account every month and store it separately to gather interest, and even equity linked instruments like Systematic Investment Plans, can start with as little as Rs 500 a month. Provident Funds and insurance plans meanwhile are, these days, entirely left to the employer.
This often means even raises are spent on paying back loans and credit card debt as well as additional expenditure, without really amplifying savings. As the IIM-A/Citi survey concludes, young professionals can probably afford to do this early on in their career. But they're also missing out on crucial opportunities to build saving habits and invest in products that will only get more expensive the older they get.
They may not be the urban poor. But they are poorly informed. And there are enough of them that this isn't an isolated problem. Why else is Reserve Bank of India chief Raghuram Rajan asking for financial literacy to be added to school syllabi?