ommon mistakes to be avoided in your 20’s
Just graduated from your college? Or just started your first job? And, want to know how to build your wealth? Then this article is for you. You may want to go shopping, traveling & exploring with your friends! However, your finances may be an area of concern for you. You are may be equally worried about your spending behavior and savings. Don’t worry you are not alone, everyone has a certain behavioral bias or spending habits that they need to avoid as per their age. So today we will be discussing the common mistakes to be avoided in your 20’s.
Before starting this article, I would like you to know that how lucky you are to think about your finances at such an early age. This is the right time to start your investments, taking a risk and just getting a good experience of the overall market and also to learn the 8th wonder of the world which is said to be “The Power of Compounding”. So, without any further do let’s begin.
The Common mistakes to avoid in your 20’s :
- Not Preparing a budget and making impulse purchases: ‘Budget’ is the systematic planning of your cash inflows and outflows. If you don’t plan this then you will never know where your finances are coming from and are spent. So, the first mistake that most people in their 20’s make is that not preparing a budget. Lack of budget can lead to impulsive purchases that may drain out your finances. For example, buying an expensive smartphone/vehicle to just show off in front of your friends.
- Revolving credit (not paying the full Credit Card bill every month): Another most dangerous habit that needs to be changed immediately is to buy everything on credit. A revolving credit facility is a type of credit that enables you to withdraw money, use it to fund your business, repay it and then withdraw it again when you need it. If you have ever purchased anything on credit you will know that these credit bills have to be paid every month and if you didn’t they will charge you a huge interest on that. Thus, use your credit card wisely.
- Income = Expenses (not having an emergency fund or saving for the future): As we have discussed earlier how a budget is helpful to know your inflows and outflows, hence a lack of it will mean that you may end up spending all your income. This may lead to lack of building an emergency corpus. To prevent this future scenario first start preparing your budget then every month keep aside a certain percentage of your income in any liquid fund to build your emergency fund.
- Not starting with Investments and Insurance early: In your 20’s you can take the risks like nobody else can in their 30’s, 40’s and so on. Because you all have time, time to learn, time to compound your investments, time to plan your future, and so on. And never underestimate the power of compounding. So, start investing. Another big mistake the youngsters do is that they don’t understand the power of risk transfer, so by taking standalone health insurance & pure term insurance they are able to protect themselves and their families from a huge financial loss. Nowadays medical facilities can drain out your whole savings in just a few days and if any medical emergency emerges then it can also take away your all assets and even increase your liability, So understand the power of risk transfer and start planning to avoid it in near future.
- Not discussing finances with parents and family, not being aware of legacy assets or liabilities: Discussing finances with your family will not only help you understand your family needs but also will help you to know any financial help you can get like an ancestral property or any legacy which will be inherited by you. You can also take the help of your elders and their experiences to avoid the mistakes they did in their life. You may not know how knowledgeable your family members can be. So, start discussing your finances with your family right now.
How one can secure financial freedom from their 20’s:
- Investments: Firstly you have to take a complete knowledge of the investment markets and its investment products each product has its features, products like ELSS (Equity linked saving scheme), Life and Health insurance and so on, you can start investing in insurance as well as you can have the tax benefit on it u/s 80C and 80D. Investments can encourage you to save money also to earn interest on your savings as well as greater dividends, than the amount you receive in your banks.
- Monthly Saving Habits : One should cultivate this habit of monthly savings, either through Bank recurring, Post office recurring or investing in equity oriented Mutual Funds through SIP’s. The sooner you start investing in SIP or any other mode linked with a goal, the faster you will get the desired cash wanted for an occasion. In your 20’s you may have certain objectives like buying a house or a car and so on in future, As these savings modes combines the power of compounding with it which will help you to get even more returns than expected.
- Credit card & EMI option: One of the best ways to purchase anything is to buy it on EMI (Equated monthly installments). Nowadays you may even have the option to buy with 0% interest on EMI, by using this option. You just have to pay the MRP of the product and no additional charges. And because of EMI you can even get the habit of a fixed cash outflow from your income, because of which you can even get a habit to start your SIP. Credit Cards & EMIs are the ‘Boon and Bane’ to society, you just have to know how to use them properly. When you purchase a credit card make sure you use it only when it is necessary or when you are out of cash, also lookout for the best offers and cashback you can get in the market, and after using it make sure you repay the bill on time to have a good CIBIL score. There are numerous benefits of such a good CIBIL score which you may have not even heard of.
Conclusion:
All I can say is that the most important thing one should understand as soon as possible is ‘Time Value of the Money’ because time once gone is gone forever. And Instead of discussing what to buy, where to go, etc. with your friends, start discussing where to invest, how much to invest. Because you have the potential to learn and grasp new things quickly so use this wisely. We at Nivesh Ki Paathshala, are always happy to help youngsters with their queries. To avail our services revert on this mail or connect with us. We would be happy to help