Your 20s are a tumultuous time. Most of us make mistakes during this period in career, money and relationships. It’s a period to learn and unlearn. Career and relationship mistakes may be inevitable, but with a some research and smart decision-making, you can avoid money-related mistakes. Here is how:
INVESTING IN INSURANCE POLICIES
If you are 25 years old and pay a premium of ₹31,000 annually for a ₹10 lakh insurance cover for an estimated maturity amount of ₹35.6 lakh in 30 years, you could have alternatively opted for a ₹1 crore policy for 30 years at a premium of about ₹7,900 and invested the balance ₹23,000 into diversified equity mutual funds.
If the funds returned a yield of 12%, your corpus would be ₹62 lakh after 30 years. Here the opportunity cost of making this mistake is ₹26.4 lakh. Insurance products should be used for protection while asset management companies should be entrusted with the task of managing investments. The cost structure and returns potential of traditional insurance policies such as endowment and money back do not compare favourably with mutual funds. Unit-linked insurance plans (Ulips) attempt to do the job of insurance and investment but the recommended route is to bifurcate both requirements and then proceed.
GAMBLING IN STOCKS
Let’s assume you get a tip from a friend to invest in a penny stock and you took the tip and put all your money in the stock which unfortunately got delisted a year later. Your stock will be worthless. Or say you bought a stock of a bluechip pharma company which later ran into regulatory problems and its price nosedived. If you need the money for an emergency, you would have to sell the stock at a loss. There are innumerable examples of investors who are not equipped to select stocks on their own and this can be termed a gamble. As there is an option of a professionally-managed product such as mutual funds which invest into equity, debt and hybrid and you can tailor make a plan to suit you.
FAILING TO PLAN
A good financial plan is absolutely necessary to maximise your income, help you invest smartly and avoid unnecessary taxes every year. If you are unable to make a financial plan, you may want to consult a professional. The standard advice is in your 20s, you must save between 10% and 15% of your income for retirement. Prepare a list of other goals including home or vehicle purchase and ensure you pay them yourself.
However, first automate the savings process so that your account gets deducted through systematic investment plans pegged to your goals before you shop.
The secret to building wealth is simple—live within your means every month. Spending beyond your means isn’t sustainable, as you’ll soon see when the bills start piling up. Learn to be happy with what you have. Spend less, and you’ll find financial freedom is more empowering and gratifying than trying to keep up with others.
ALLOWING CREDIT CARD DEBT TO ACCUMULATE
The first mistake is letting your credit card debt spiral out of control, be it because you use your credit card for every purchase or because you aren’t watching your total debt . You may also be paying back only the minimum amount due on your card and the interest which is averagely 3.5% monthly quickly compounds to an unmanageable figure. Your credit score is based on your history, so if you miss payments, it could haunt you for decades to come.
(Nisreen Mamaji is a certified financial planner and founder of MoneyWorks Financial Advisors)
Jun 10, 2019 07:12 IST