10 Financial Mistakes in Your 20s and Ways to Avoid Them

financial mistakes, avoid financial mistakes

Your 20s is an important stage of your life. This is the time when you start your career. A lot of financial responsibility seeps in and dealing with it for the first time can be a bit overwhelming. On top of that, your paycheque may lure you to splurge and doing that once in a while is not a bad thing at all if you know how to manage your finances. However, history beckons that anything that crosses the limit has adverse effects, and the same goes for continuous impulsive spends.

It’s important to know your priorities and take finance related decisions wisely so that you don’t have to brood in your 30s or in the later stages of your life. Remember, if your foundation is strong, you will be able to sail through any difficult financial situations.

Here are certain financial mistakes that you might make in your 20s and how you can avoid them.

1. Spending more than you earn:

Frequent shopping, partying with friends, and other impulsive spends are what twenty-somethings indulge in often. It works as a stress-buster for sure, however, it can financially drain you later, especially if you are spending more than you are earning.

Tip: Spend less on items that are not important. In that way, you will be able to save a bit too. You can also keep aside a certain amount from your income as an emergency fund or put that money in investment vehicles for beginners, like a fixed deposit (FD).

2. Not investing early:

You may ask why invest now when you can put your money to work in the 30s as well? Always remember that the earlier you invest, the more will be the returns. Treat it as a part of your financial goal that will help secure your future.

Tip: You can start investing in something risk-free like a fixed deposit. Though the returns are not as high as investing in mutual funds, stocks, etc., it’s guaranteed. Also, you don’t require a large amount to invest in an FD.

3. Not having a monthly budget:

Having a set monthly budget will help you live within your means. With monthly EMIs and other bills to clear, not having a budget can create immense financial stress.

Tip: Note down all your mandatory expenses and create a budget based on that. It will help you keep a check on unnecessary spends. That doesn’t mean you shouldn’t spend on any non-essential. Budget your entertainment expenses as well so you don’t go overboard.

4. Over-dependency on credit cards:

Having a credit card is extremely convenient and financially useful. It will help you build your credit history, thereby making you eligible for a host of financial products in the future. However, you need to understand that it is borrowed money. Spending aimlessly with your card can get you in a lot of financial trouble. You can rack up debts in no time and making timely payments can get stressful. Especially because they charge one of the highest interest rates compared to other credit lines. Also, defaulting on payments will drastically bring down your credit score.

Tip: Use your card in such a way that you make the most of your purchases. For instance, if you spend more on grocery, choose a card that gives you rebates on grocery purchases. This way you will earn something back every time you use your card. Another alternative is your debit card. Using a debit card will refrain you from falling into the debt trap.

5. Not creating an financial emergency fund:

In times of financial emergencies, having an emergency fund helps. For instance, you are living well within your means and your finances are in control. However, that stability is disrupted when you learn that a massive lay-off has happened in your company and you have lost your job. In such out-of-the-blue situations, an emergency fund will help sail you through the tough phase until you get your next job.

Tip: Ideally, your emergency fund should be 6 months of your monthly salary or more. In order to do that, start putting 20% to 30% of your monthly income to create a fund. At first glance, it might seem a mammoth task to achieve. But with proper planning and determination, you will be able to do it.

6. Not having a health insurance policy:

Let’s face it. Medical treatments are expensive and two to three days in the hospital can pile up heavy bills. Signing up for an insurance policy will help you to get through such situations. Although many companies provide health insurance to their employees, the cover will be very low and only the basic policy will be provided which might not cover many treatments.

Tip: Sign up for a health insurance plan and secure yourself and your finances. It is advisable to get a comprehensive policy covering most of the critical illnesses.

7. Not having a credit history:

You may ask what’s the harm of not having a credit history. Though it won’t directly affect your finances, not having a credit history is something that’s not advisable. Banks and financial institutions are apprehensive about lending to customers with non-existent credit histories and here’s why – your credit history and score measures your creditworthiness as a borrower. It tells the lender the risk of approving your credit application. So, not having this history will impede the lender’s evaluation of your creditworthiness, thereby, leading to loan rejections.

Tip: Use your credit card to build your credit score. You can do this by making timely payments, not going over the credit limit, making full outstanding payments or paying more than the minimum due.

8. Not clearing bad debts first:

One way of looking at bad debts are those debts that charge the highest interest rates. These debts will cost you the most. For instance, credit card debts are bad because they charge interest rates of approximately 38% p.a. to 42% p.a. Also, the interest rates are compounding which means, not paying the full outstanding balances will add more interest to your already high rate. Other debts include loans such as personal loans, car loans, etc.

Tip: Clear dues that charge you the most and work your way down to the least cost debt. This will help you save on interest, thereby, helping you put your money to better use and improving your financial situation.

9. Not having a retirement plan:

Getting a job after a certain age is next to impossible. Also, you don’t know what your health condition will be once you start nearing your retirement age. If you don’t have savings, you will have no source of income during your retirement. That is why you need to start saving now so you can live comfortably during your retirement.

Tip: Start investing in different avenues, sign up for different insurance policies, and money-saving plans today. Your savings will start to grow as and when your investments mature or turn profitable.

10. Staying at a bad job:

This does not have a direct impact on money, but it certainly is damaging. If you’re unhappy with your job, it can have a ripple effect on your life. It can cause depression and lack of motivation, thereby, affecting your appraisals, promotion, and career growth. Additionally, it can start permeating to other aspects of your life, ultimately impacting the financial decisions that you take.

Tip: If you’re unhappy with your job, first assess the situation and find out the root cause of it. If it is something that can be fixed by staying at your current employment, then talk to your management regarding a change in role, work timings, etc. If you feel it is the work environment or that you’d like to do something else with your career, then start looking out for those opportunities. The best part about being in your 20s is you finding your footing, so, career changes are far easier now and will have a less adverse financial impact on your life than you trying to change your career path when you’re much older.

So, pull up your socks and start saving so that you can have a better future. With a strong financial foundation, you will not only have a secure life but also grow your overall wealth exponentially.

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