We have goals of reaching a target income and are always on the run to reach that income goal. However, the real winners are those who know how to make that money work for them. Earning and Investing are two completely different skill sets. It's great if you are good at both however it's not necessary that the person who is good at earning money is also good at investing.
As a person who is in their late twenties, I think I now have experience in investing. So, in this article, we would discuss the money mistakes you should avoid in your 20's.
1. Running Away from Learning Personal Finance
Trust me, I have been there and have done that. For years, I avoided learning about Personal Finance thinking it's such an alien subject to me. It's all about numbers which I never really understood.
But but but, once you get over this fixed mindset that learning about finance is complicated and you start to put genuine effort to understand it, it's quite simple. It also teaches you some important life lessons such as patience, how to deal with failure and the most valuable one being "Consistency compounds over time".
If you struggle to understand even after putting in some effort, it's best to take help from a financial advisor.
2. Skipping the Term Life Insurance
A term life insurance ensures that in case something happens to you, your family receives the amount of coverage that you pay the premium for. Most people skip this investment thinking it's a waste of money. However, in my opinion, it's a very important investment to consider.
What is unique about this is, the younger you start paying the premium amount, the tinier is the amount. This premium amount remains fixed throughout the period.
Having a minimum cover of 1 Crore is better than having nothing at all. I urge you to consider starting a term life insurance as early as you can.
3. Not Saving for a Retirement Fund
Gone are the days when people survived solely on the pension that their employer's payout monthly. Even if your current employer has a pension scheme, I'm pretty sure it's the bare minimum and not enough to survive in these times.
This is where the Retirement Fund comes into the picture. It's an amount that you keep adding to your retirement fund on a monthly/quarterly/yearly basis that serves as a repository for your retirement. It slowly builds over time and also earns interest for you.
This accumulated amount can then be withdrawn as a monthly payout post your retirement. In my opinion, I think everyone should start thinking about their retirement within their first year of earning a regular income.
4. Not Having a Diversified Portfolio
Not every sector flourishes at the same time. With the recent example of vaccination for Covid, you would have noticed that the companies that were involved in its research and production soared to their all-time highs. So, also the technology and pharmaceutical companies saw high peaks during this time.
On the other hand, real estate, places of recreation such as malls, movie theatres were the worst hit. It's therefore important to have a diversified portfolio of stocks or mutual funds that invest in companies from various sectors. This is so that you don't have to bear huge losses and your portfolio remains balanced at any given time.
5. Not Having an Emergency Fund
One of the first steps to take into your journey of Personal Finance is to have an emergency fund. It is a repository of money that you would save up which would be useful in cases if you suddenly lose your job or have a family emergency. As the name suggests, it is to be used only in case of emergency and not be touched otherwise.
To calculate the amount you need to invest in your emergency fund, you would need to sum up all your necessary expenses required for a month and multiply it by 6 months or 12 months. This amount needs to be available at your disposal at any given time. There should be minimum friction and you should be available to liquidate it as soon as possible.
6. Spending More than You Can Afford
Very often, we end up purchasing things and living a lifestyle that is way beyond what we can afford. This may seem very attractive in the beginning but it's difficult to sustain such a lifestyle. It's important not to suddenly change your lifestyle once you start earning a decent income.
Jay-Z once said, "If you can't buy it twice, you cannot afford it". This makes so much sense. Now, whenever I plan to purchase something, I always think if I can buy it twice. It's a neat way to keep you grounded.
7. Maxing out your Credit Card Bills
In my opinion, the credit card was one of the smartest inventions of humankind. You must, however, take additional efforts to understand its functionality so that it works in your favour because if you misuse it, you will soon end up in a debt that would be hard to recover from.
Falling prey to misusing the credit card is quite easy as it's very enticing to keep spending without paying a penny. It's extremely important to pay your bills in full amount on a monthly basis. Having good credit holds so much importance, so it's best to maintain a good score.
These are 7 Money Mistakes that I think we should avoid in our 20's. What were your money mistakes in your 20s? Please share them in the comments below so we can all learn from them.
Disclaimer: The opinions in this article are all from my personal experience. I'm no finance expert, so please consult your advisor before making any investments.
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