The best thing that people in their 20s have is time and the power of youth. It is the time when they have just started their lives and the whole world is in front of them.
Many of them have just started to earn their first paychecks and paying off their student loans.
If you are a 20-something, you are just starting to figure out your life, and you may feel that nothing is going to happen to you. But experts say that sooner you start managing money, the better your future is going to be.
The following Money mistakes you can avoid in your 20s, to improve your financial health.
Major Money Mistakes of 20s
1. Not Saving For Retirement
This is one of the most basic financial mistakes that young people do in their 20s.
They should realize that the earlier they start saving, the better it is going to be for their future. Here, the power of compounding applies – the longer the time you will save, the bigger the amount will grow.
Let us suppose that you are 25 years old and investing 1000 rupees/month – not a large amount, right? At 12 percent annual interest if you invest it for 40 years till the age of 65, that amount will go to – guess how much? A crore! Yes, you heard it right!
At the same time, if you start investing from the age of 35 till you reach the age of say, 65, you will earn only 30 lakhs rupees. So, if you did not start saving early, you will lose a whopping 70 lakhs!
This is the benefit of investing in a retirement fund from an early time.
2. Not Having An Emergency Fund
Having an emergency fund is essential to face any crisis in your life and there are many reasons to prepare for unexpected costs.
It can be anything – a car crash, losing your job, medical emergencies.
These come without any warning and if you don’t have enough money in your bank, you might end up in credit card debt. So, it is essential to have an emergency fund, comprising of at least 3 months’ salary.
Later when you are more comfortable, you can take it up to 6 months’ salary. This will be like your nest for rainy days.
3. Shying Away From Stocks
It is true that most of the young people who manage money in 20s, do it too conservatively for their retirement and risk having too little money to spend their golden years comfortably.
If you have been avoiding stocks in your portfolio, it’s time to change that strategy. Though bonds are indeed a more stable investment than stocks, they also give a much lower return over time.
The long term share market investment mantra is to keep a steady portfolio of 10-15 stocks.
You should only invest in solid, quality stocks, and stay invested for a long time. Common money mistakes that millennial do is that when the market is rising, they buy stocks indiscriminately, on the fear of losing out. This should be avoided at all costs.
4. Getting A Credit Card
Getting a credit card is a sure-fire way of getting into debt because the amount you spend and don’t pay just grows and grows.
Having a credit card can help you build up your credit score but too much use can lead you to a cycle of compounding interest and debt.
Credit card debt can wreak havoc on your finances because if you can’t pay off the amount that you spend every month, you will be in a vicious cycle.
Using a credit card for your daily expenses is not a sound financial practice. However, you can use credit cards to your advantage also.
Suppose you have to rent a flat, and you don’t have the deposit money. You can use your credit card to pay it. But just remember to pay it back within the financial month, so that you don’t have any added expenses.
Also, judicious use of credit cards can help you get added benefits like frequent flier mileages and bonus points which you can redeem. This can help you to get lots of savings.
5. Try to Keep Your Rent Low
Young people spend a lot of money on rent which can extend to 45 percent of their total income.
Don’t spend too much on your rent. Ideally, when you are in your 20s, you should not spend more than 30 percent of your total income on rent. This is one of the important money lessons you should learn in your 20s.
Another money mistakes that young tenants do, is to sign the lease without reading the whole document. Sometimes the end of the lease could include an automatic renewal clause leaving you to pay termination fees if you want to move out early.
6. Getting Behind on Your Payments
When you fail to pay the E.M.I.S of your car or housing loan, you create a vicious cycle that is hard to break. You will end up paying late fees and other charges, each month you fall behind.
It may also damage your credit score, making it more difficult for you to get loans in the future. So, if you are falling back on your payments, you should analyze the reasons behind it and ensure that it doesn’t happen again.
7. Not Subscribing to An Insurance Plan
Health insurance protects the policyholder and the family members from the massive costs of any medical emergencies that require hospitalization.
You have the option to choose different types of insurance plans that include critical illness insurance, family health insurance, group health insurance, and individual health insurance.
Another important point to note is that you should provide correct information to the insurer. Failure to do so, or giving false information, can get your claim rejected.
8. Spending More Than You Make
The secret to growing wealth simply requires you to live within your means. Nothing more, nothing less. When you see that everyone else is having a good time, you also have these spending urges.
Instead of defining savings as money spent after spending, it is good to keep aside some money at the start.
When you are in a tight financial situation, you may be tempted to borrow money from family members or friends. But this is not good financial behavior, because if you do it regularly, they will avoid you like plague!
It’s a good idea to avoid loaning money to friends or family also since it tends to destroy relationships.
Investing in a Systematic Investment Plan or S.I.P. is a very good idea because a certain amount of money will be put aside from your debit account and put into that savings account, each month.
9. Not Comparing Pricing
You should always compare prices on different apps or websites before purchasing. It can be anything from groceries to furniture. Many apps offer discounts and offers, and you can save a lot over time if you look out for them.
So, young 20 something, you have just started to enter the workforce and pay your credit card bills.
There is a lot to figure out in your life as you take the first step towards independence. But remember that money management should be one of your top priorities.
10. Buying A New Car
Buying a brand new car is the worst of all financial blunders that one can make.
A car is a depreciating asset, and a new car depreciates a lot. You also have to pay a lot on insurance and road taxes. So, it is best to buy a used car that is not so old and well functional.
What you do to avoid major money mistakes? Don’t forget to share your opinion…
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