The 20s are the time to make the most whether it comes to spending, enjoying life, or making money. However, this is also the time when most people do not understand the importance or the value of time. It often leads them to make many mistakes that could ruin their financial future or their chance to multiply their savings.
Given below is a brief idea of such common mistakes that should be avoided by people in their 20s to have a healthy and secured financial future without the need to be dependent on anyone.
Top financial mistakes that need to be avoided in the 20s
Some of the common mistakes that are often made by many youngsters are mentioned below.
a. Not planning for retirement
Most young people in their 20s do not even think about retirement. It is quite a distant event that is often considered to have the least priority in the scheme of things. This is one of the most dangerous mistakes that lead to poor retirement planning. Ideally, this is the best time to start investing in retirement funds. As the number of responsibilities at this age is quite low, investors can afford to invest aggressively and create a good amount of corpus funds to get the maximum benefit of compounding.
b. Not taking term insurance and health insurance
Term insurance and health insurance are essential investments for every individual, especially in this era of uncertainty. However, not many realize it and often tend to avoid taking any kind of insurance until they are in their 30s or early 40s. This is another grave mistake that needs to be avoided. The thumb rule or the key in buying insurance is buying it as early as possible. This will help in getting higher coverage at a reduced premium cost. Hence, it is advisable to buy term insurance and health insurance in the 20s to maximize the coverage and plan the cost of insurance in the monthly budget.
c. Piling credit card dues
Credit cards have become a necessity in today’s digital world. Credit cards give the freedom of spending without the need to use actual cash and also a basic credit period of 50 days. However, cardholders need to pay the credit card dues on time to avoid the heavy interest cost charged on the overdue credit card bills. Interest on credit card overdue is highest among any loan category (ranging between 36% to 50% per annum approximately). It is therefore important to avoid piling up of the credit card dues which can easily land the cardholder in a debt trap that can be quite difficult to come out of.
d. Not building an emergency fund
Accidents or emergencies do not come with an announcement. Having a nest egg or regularly saving a part of earnings to create an emergency fund is important for every individual. This will help them in having financial peace of mind at the time of emergencies. Such an emergency fund can be built gradually by starting at the earliest. The 20s is the ideal time for building an emergency fund as there are not a lot of expenses and responsibilities at this stage allowing the individuals to allocate more money to their emergency funds.
e. Not saving enough money
An important mistake that many people in their 20s often do is spending too much of their earnings and not saving enough. Most experts believe that 50% of the earnings can be spent towards basic necessities like rent, groceries, etc. 30% can be spent towards luxuries while the balance 20% has to be saved on quality investments like mutual funds, ETFs, insurance, etc.
f. Not having defined financial goals
We have discussed the importance of savings and creating an emergency fund. It is equally important to set defined financial goals which make it easy to alter the minimum amount of savings that is needed at every stage of life. Financial goals can be short-term (like buying home appliances, repairs, and renovation to home or office spaces, etc.) or long-term goals (like saving to build a downpayment for a new house, building a retirement fund, etc.)
g. Missing payments in loans or credit card dues can damage the credit score
Credit score is based on many factors and one of the key factors is the timely payments of the credit card as well as loan dues. Missing such important payments will adversely affect the credit score. Not many people understand the importance of credit score and the effect it has on the creditworthiness of the individual. A poor credit score will make it difficult for the person to get the necessary external finances in the form of loans from the lenders at a reasonable interest cost. Hence, it is important for individuals in their 20s to repay the loan EMIs and credit cards dues on time and to build a sound credit history. This will help them get any kind of loan without any hassles.
h. Missing out on tax planning
Tax planning is one of the major considerations for every individual while selecting the various savings options. This will help them not only save on taxes but also build a good corpus fund for retirement. The 20s are the time to make aggressive tax planning and maximize the benefit of the various tax laws. Not taking the advantage of various tax deductions and exemptions at this stage will not lead to efficient tax planning. The individuals may end up paying more tax on their earnings which is a dead cost without any returns.
The 20s are the time to make mistakes and are also about growing up to be ready for the challenges that life is going to lay ahead. However, the financial mistakes made in the 20s often have lasting repercussions and can damage the chance of maximizing the wealth in the long-term. Therefore it is necessary for everyone to be careful of their finances in their 20s and not make the common mistakes mentioned above.
The most common mistake done by young and novice investors while investing in stocks is blindly following someone else’s portfolio or investment advice without due diligence or understanding of the stock markets.
Some of the top funds for investment in the 20s are,
-Public Provident Fund
-Post Office Savings Schemes
Some of the ways to fix the financial mistakes are,
-Paying the credit card dues on time
-Starting a retirement fund at the earliest
-Not investing in stock markets without a basic understanding of the markets and their volatility
-Create a budget and stick to it
-Create an emergency fund at the earliest and not tap into it for frivolous expenses
Missing loan EMIs can lead to lowering of the credit score and it can affect the long-term loan sanctions.