The Worst Financial Mistakes Young Adults Make (And How to Correct Them)5 minute
Now that you’re here, it’s clear that you’re interested in financial planning, which is the first essential step. It is believed that a failure to plan is a plan to fail. To be secure, you need a plan for today, tomorrow and your future. A classic example of Rajveer Singh from the bollywood film- Ta Ra Rum Pum, gives us many life lessons on how one must spend wisely and plan finances. Rajveer’s lack of planning leads the family from riches to rags in no time. And I’m sure you don’t want to turn into a Rajveer in future.
From maintaining a piggy bank to hiding ‘safe money’ in almirahs or under mattresses, we Indians are often traditional and conservative about our ways with money. However, times are changing and the world economy affects Indian economy too. That’s the reason we cannot be planning our finances the way our parents or even grandparents did in their time and age. What worked for them may not necessarily work for us today.
The millennial generation is far more driven than the previous generation. Education and career are high on their priority lists. Therefore, saving and investing naturally becomes a part of their personal goals. However, there are multiple mistakes we tend to make when it comes to money. And it’s only right to realise early and make necessary corrections for a future that can be rich and bright. If you are completely clueless about where to start, we’ve got some tips to help you avoid financial blunders.
1. NO PLAN = BAD PLAN
When thinking about the need for a financial plan, just ask yourself the below questions:
Would you cook a dish without knowing a recipe? Probably not.
Would you construct a house without having a blueprint? Again, probably not.
Then why do you steer through your financial journey without a proper plan in place. No matter how much money you make, you definitely need a financial plan with long-term goals set in advance. Having a financial goal not only helps your financial future but also lets you plan other important areas of life. A plan can help you avoid spending money mindlessly.
Whether it’s buying a new car, a house, or even taking a big vacation, it all demands you to plan your money so you can live your life your way. Planning for your retirement should ideally begin in your 20s, right from the day you begin earning. With fewer responsibilities, it’s easier to save more in your initial years. The earlier you begin planning, the more money you make.2. PENNY WISE, POUND FOOLISH
You know saving money is the right thing to do. But it ain’t easy. It involves a lot of sacrifice and discipline. You’re young and want to live life like there’s no tomorrow. But the harsh truth is that there is a tomorrow, and you can’t predict what it may bring. Whether it is going out to eat or taking short vacations every now and then or buying stuff online, without a planned budget, it is hard to keep a track on your daily expenses.
Ordering lunch doesn’t seem like a big deal at the moment but when you sit down and add up the cost of your lunches every day up to the month, it adds up to way too much spending. With a budget, you can avoid such shocks at the end of the month. A budget provides a clear spending plan keeping in mind the present income and future goals.
In the end, this leaves you with more cash to save and invest. Set aside money for your regular expenses, once-in-a-while costs like insurance or repairs and also for ‘things that make you happy’ like going out with friends, music downloads and so on. Rewarding yourself with a few luxuries every now and then will make it easier for you to stick to the plan. Spend some to enjoy your present and save some so you can continue to enjoy life in the future.3. SHOP NOW, PAY LATER?
The idea of shop now, pay later is too good to be true, right? Credit cards can be helpful only if you manage money strategically, and dangerous if you don’t. It’s very easy for consumer debts to spiral out of control. There’s always good debt and bad debt. Borrowing money to study abroad or to buy a property pays off in the long run. However, borrowing for things you don’t even need can make you regret later.
If your bank account has no money to pay for the price tag, then just walk away from it. Also, always remember to pay off your credit cards as fast as you can, to avoid a big interest burden. Credit cards are nothing but loans that need to be repaid sooner or later. The right way is to set aside a fixed amount from your budget every month to pay off debts.
4. SAVING TO SAVE
Save to invest. Don’t just save to save. Depending on just one source of income is foolish. Saving money is important. However, relying on it is not enough to achieve financial independence. To realise your dreams of owning a house or building up enough to retire early, you will have to invest. Begin investing as early as possible. Set aside some amount every month, these small sums of money can lead you to big gains if you give it enough time. Assuming you skip just about two Rs. 5000 worth night-outs every month, in ten years, at 12% interest rate, you would make around 22 lakhs, enough to buy a high-end SUV. In other words, if you want to live your big dreams sooner in life, start investing.
The rule is to:
- Make money.
- Invest that money to make more money.
5. WHY INSURE?
Nothing feels as worse as walking out of your workplace realising your bike has been stolen. And unfortunately, you can’t do anything about it because your bike is not insured. Don’t wait for unfavourable situations to happen to you to realise you need insurance. Yes, paying for insurance may feel like an unnecessary expense, but it is important in order to deal with unseen circumstances.
Insurance keeps you moving ahead in life. In case of medical emergencies, thefts, accidents, being insured helps you recover sooner and move forward without stress. No matter how young and healthy you are, or how good a driver you are, we all need to be secured. You don’t want your years of savings to vanish off because of one unfortunate incident.
All in all, having insurance is an essential part of financial planning. There are various kinds of insurance- home insurance, life insurance, vehicle insurance, health insurance and so on- each covering different areas of your life. Also, when buying insurance, keep in mind– the requirement, the policy benefits, and your ability to pay the premium.
6. GOLD IS OLD
Buying gold is one of the oldest ways of investing. Unlike investment in the stock market or deposits, gold doesn't contribute to your economic growth. Here are few reasons on why you must rethink your idea of purchasing gold as an investment:
- It is an unproductive asset. A pile of gold remains the same no matter how many years pass by.
- The growth in its value depends completely on the theory that someone else will pay more for it eventually.
- The equivalent amount of money when invested in business can grow better in a fundamental way.
- Gold is treated as a collectible, hence taxed unfavourably.
If you wish to safe-lock some amount of money for a long time, then investing in gold bonds could be an option. Contrary to traditional Indian beliefs, gold should only be treated as an alternate currency and nothing more.
7. INVEST AND FORGET
Just like you relook at your wardrobe every season, it’s important to keep a track of your investments too. Not reviewing your investment portfolio can bring you losses. Markets fluctuate, and with altering times, you might need new investment options to maximise returns. We often tend to invest all our money in one category of assets. Doing this reduces your chances of higher returns you could have earned by trying out different instrument types or asset categories.
Once you review, you must weed out the non-performing stocks and re-invest in better funds. This way you can correct your investment mistakes which are sure to arise. If you’re not a seasoned investor, it’s best to keep yourself updated with market trends and look out for right guidance.
The word ‘Greed’ is replaced by ‘Fear Of Missing Out’ today in the investors language. It is one of the emotions that can destroy you as an investor. Social media these days has increased the power of this emotion more than ever. Don’t rely on big stock-talks and it’s wrong to get overwhelmed with new market trends.
Each of us have different personal goals to be achieved at different points of time. So don’t base the judgement of your investment on others’ portfolios. Choose wisely who you discuss stocks with. Remember to not talk about your investment strategies with random strangers online or offline.
Take the advantage of being young and free from responsibilities to plan your life ahead. You have a lot of time to plan every step. Most youngsters often overlook their finances due to their lack of knowledge about how it can affect important areas of their life.
While financial planning may seem complex, it’s fairly simple once you start your journey. Everyone wants to get richer faster. But remember, to gain from investments you’ll need to be disciplined and patient.