With independence comes responsibility - especially when it comes to money. Here are a few mistakes to avoid financial blunders in the long run.
Are you in your 20s and have just started to earn? It’s the time when you are transitioning from your teens to being an adult, taking up responsibility. Hence, it is important for you to know the financial mistakes to avoid when you start earning.
Your 20s are a transformative decade which can make you or break you, especially when it comes to money affairs.
Due to your lack of financial security and adequate financial knowledge, you tend to make a lot of money blunders.
Be smart. Make sure to avoid these 5 financial mistakes when you start earning:
1. Not Saving any Money or Creating an Emergency Fund
Starting to earn, becoming independent and spending your own money is a great and exciting feeling. But don’t splurge it all away without thinking twice.
Today, building up your emergency, retirement, and savings assets is more crucial than ever. Even if you start with just 10% of your income.
People often turn to credit cards and other high-interest loans to cover crises when they don't save for them. Paying it back can burn a hole in the pocket.
In times of financial hardship, this 10% from each month's savings adds up with each paycheck.
It is advised to keep at least 3 to 6 months worth of living costs in your emergency fund. You should also set financial goals for yourself if you need or want anything.
Here’s why investing in gold for an emergency fund is a good idea.
Long-term growth from opening a retirement account in your 20s might total lakhs or even crores years down the line.
Must Read: A Beginners Guide to Start Saving Money Smartly
2. Paying High Interest on your Credit Card
You might already have had a credit card in college before starting your first job, or you may have gotten one after it.
Credit cards can be useful tools for convenience and credit history building, but they can also lure you to spend more than you can afford.
Due to their lower salaries, young adults may find their credit card payments daunting. As a result, paying merely the minimal sum is appealing.
The minimum payment trap, however, will cost you dearly in future interest charges.
Your money could be eaten out by interest on credit card fees. You are compelled to repay more than you borrowed, which results in an endless cycle of debt.
So when using credit cards, use caution. It can be advantageous to take advantage of rebates, cashbacks, and other deals, but watch out for excessive interest rates.
3. Not Budgeting and Tracking your Money
Many people, when they start earning, with a new life and sometimes a new city, tend to overlook the need for a budget.
They associate budgeting with having enough cash on hand to cover expenses.
But creating a proper budget is much more than that. It is a requirement for financial planning, and not keeping track of expenses and cash inflows can result in disarray and unbalanced finances.
Never Followed a Budget? This Budget Guide can give you a Headstart.
You can better comprehend your spending patterns and what you're actually doing with your money if you keep track of it.
You may believe that you are a frugal person who makes intelligent purchases and goes to great lengths to save money, but when you look at the specifics, you'll see that your daily coffee, lunch at a restaurant, and happy hour drink outweigh your savings.
Maintaining a budget is as simple as keeping track, establishing goals, and modifying your financial habits as necessary. Your spending is optimised and you can find unnecessary expenses with the aid of a budget.
You can examine how your finances are distributed across your expenses, liabilities, and savings in order to make both present-day and long-term plans.
Here’s more: Know all about Savings Mantra- the 50/30/20 rule
4. Spending more than you Earn
You came across this luxury bag which costs three-quarters of your monthly salary. You convinced yourself that you need it, can afford it, and it’s just a one-time purchase. This mistake is fairly common!
Spending excessively on pleasures like apparel, trips, and devices might be alluring. But if your salary is insufficient to pay for these non-essentials, you might have to control these impulses or turn to higher-yielding solutions.
Understanding how to live within your means is a crucial lesson in financial literacy. Stop exceeding your income with expenditures and evaluate your spending plan.
By living within your means, you can avoid debt. Limit new purchases. Compare, borrow, and use. Avoid spending a lot of money on products to make up the difference.
You can prevent bad spending habits from starting by learning to be appreciative of what you already have.
Here are 14 tips to stop impulsive buying and curb your spending.
5. Delaying your Investment until Income Increases
Many young earners don't begin saving early, let alone investing. This can even get challenging if one is broke.
But this delay in investment can show its results in the years to come with a small retirement corpus.
With the help of compound interest, even a little sum can eventually grow significantly. It can also help you keep up with inflation.
Hence, a little is better than nothing. Start small. You can gradually increase the investing amount as your salary grows.
Why not go for safer bets with low risk if you’re new? Jar app helps you in saving with small amounts, starting from just Rs 10, by investing that money in Digital Gold. Plus, it’s all automatic.
Check out: 5 Ways Investing in Digital Gold Can Make You Rich in the Long Term
If your savings grow in the years following your salary rises, the amount of money saved in the early years of your employment climbs immensely over the course of the next 25 to 30 years.
If you start an SIP at the age of 21 of Rs 4,000 in an equity fund that gives 12% returns, you will accumulate Rs 1.26 crore in 30 years.
But if you wait till 28 to start investing, your corpus will be smaller by around Rs 79 lakh.
Even if you enhance your savings by 10% every year, what you put away in the first 10 years will account for almost 24% of the total retirement corpus.
The longer the delay, the smaller the corpus.
Read more about how delayed investments to plan your retirement can cost you dearly.
As it is said, with freedom comes great responsibility - majorly for your finances. Build a secure financial future which can support both your good and hard times.
Keep these 5 points in mind when you get your next paycheck and get a hold over your finances from an early age itself.