You are in your 20s. You have just started earning and are enjoying the financial freedom you’ve worked so hard to get. This is what two decades of hard work was for right? Right. Your 20s are all about going out and enjoying yourself. 20 years of all the effort you put in as a student is finally coming to fruition. Even your hangovers are less debilitating. However, while it is important to enjoy this stage of your life, it is essential that you avoid certain mistakes that may come back to haunt you later. Here are some common mistakes that you should be aware of.
- Not making a budget
Creating a budget to control your spending is the last thing most people in their 20s do. More often than not, money is spent until it’s gone. Even though making a budget sounds tedious and boring, i.e. something that your future self should do, a budget actually gives you more financial freedom. It prevents you from spending too much in areas that do not require the capital, and helps you keep enough to spend in areas that are important to you.
- Not having an emergency fund
Even though it’s hard to imagine that something could go wrong when you’re young, it is impossible to know what the future holds. Even something as simple as relocating to a different apartment can spell disaster financially if you are on a tight budget. It is advisable to start contributing regularly to a highly liquid fund for when the unexpected happens.
- Ignoring Insurance
Most of us in our 20s seldom realize the importance of having an insurance cover. In insurance, the later in life that you purchase an insurance plan, higher the premium you will have to pay. Even though you are young, you are not immune to injury and illness. The rising healthcare costs ensure that without proper insurance cover, you will incur serious expenses in case of any unforeseen events. Thus, it is advisable to get yourself adequately covered at the earliest.
- Not setting financial goals
The majority of the people seldom think about financial goals when they start earning. They are young and just looking to enjoy themselves. However, in the absence of financial goals, you more often than not end up overspending and rely on debt when the time comes. Financial goals provide direction to your savings and investment. It is advisable to align your investments with a set of financial goals. For example, if your financial goal is to buy a car, it may not make sense to invest in equity instruments if you are looking to buy the car within the next 2 years. Equity can be volatile in the short term and you might be forced to redeem your investments at losses or delay your plans till the market recovers. It is always advised to set a few goals; you can always change them, but without them you are just drifting without being mindful of where the current is taking you.
- Not building your Credit History
Your credit rating is evaluated by all banks before commissioning a loan. A low credit score will cause your costs to be higher for things like insurance, car loans or mortgage rates. In India, CIBIL or Credit Information Bureau (India) Limited has been collecting and maintaining credit information of Indian residents provided by Indian banks and NBFCs. An easy way to build good credit rating is by getting your own credit card and paying it diligently. Using credit cards to make purchases and payments is equal to availing loans, but does not involve an additional interest cost as long as the bills are paid in time.
- Waiting to save for retirement
For most young earners, retirement planning is something of a distant goal that can be ignored for immediate expenditures or short term financial goals. However, in a time of rising life expectancies and trend of nuclear families, a large retirement corpus is a must. When you are young, you have a nice long time horizon before retirement. Starting early allows you to stay invested for a longer time and you can let compound interest grow your money. Albert Einstein, one of the smartest men to have existed, has said, “Compound interest is eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it” He also called it “the most powerful force in the universe”.
- Staying ignorant
It is never too late to become financially literate. The internet provides us with a huge number of opportunities to gain awareness about various topics. It is full of great tips and sites that can help you organize your finances. You also have access to a range of advisors. Having the guidance of a financial advisor is an excellent idea, but blindly trusting anyone can be dangerous. Make sure that the advisor you choose is trustworthy and not looking to simply push products that will get him/her the maximum commission.
Your 20s are a wonderful time. You have gained new found financial freedom, and your body is running at its peak. It is important to enjoy this phase of life, but you will enjoy your 20s even more knowing that you’re also building a solid future.