From a financial perspective, your 20s could be some of the most crucial years of your life. Freshly out of college, transitioning into a new phase in your life, new job, new responsibilities, and so on. It is as scary a time as it is exciting.
Planning your finances is probably the last thing you’re thinking of right now; and understandably so, you’re just getting started, you have so many years ahead of you. You’ll figure it out in time. But this is where millions of young people are mistaken. You don’t necessarily have to have a retirement plan in place right now, but you do need to have some understanding of the financial ecosystem that you’ll be spending your life in. Minor mistakes can rack up thousands in debt over time.
Here are 5 financial mistakes you need to avoid in your 20s
- Using your credit card for everything
- Skipping on Health & Life Insurance.
- Not budgeting your finances
- Not setting financial goals
- Losing out on the power of compounding
Using your credit card for everything
Your credit card is the easiest way to rack up debt, without you even realizing it. It is something that helps you easily give in to buying things you normally wouldn’t have. Understand your psyche, do you give in to instant gratification? If so it is best to avoid a credit card altogether. If you feel that you can keep a credit card, and use it only for emergencies only, go ahead by all means.
Make it a habit, to primarily use your debit card for all your needs and wants. Using your debit card ensures you only spend the money that you have. This also empowers you to stay on top of your finances and not fall into a debt cycle.
Skipping on Health & Life Insurance.
The uncertainties of life keep growing every single day. There are a million possible ways you could fall ill or worse, die. Death is a concept that, no matter how much you think about it, always feels like a far-fetched idea. This is when health & life insurance comes in handy. Consider that Insurance is the lifeboat that helps you survive storms that the ship of life has to face.
Having health insurance ensures that you have quick access to emergency medical funds when you need them the most and that you need not dip into savings that will be earmarked for other goals. You can even extend this insurance to encompass your immediate dependants and family – parents, spouse, children. Whereas having life insurance makes sure that your financial dependants receive a sum of amount that can help them rebuild their lives, after you.
Need help deciding on an insurance plan? We can help.
Not budgeting your finances
Do you feel like no matter how much you earn, you seem to end up with no money by the end of each month? Well, a little budgeting can help you solve this issue, regardless of how much you earn. While there are tons of ways to budget, a simple and easy to implement way is to budget your finances in a 50%-30%-20% ratio.
50% of your income goes to your needs such as rent, utility, bills, etc. 30% of it goes to your wants such as going to a movie, clubbing, clothing, etc. And the last 20% goes to savings & investments.
Not setting financial goals
Just like you set goals in your job to advance in your career, you need to set financial goals to grow in your financial journey. These goals can serve as milestones to guide you in your financial journey. The goals can be anything from saving for a trip or a new laptop to a house. Doesn’t matter if you feel that these goals can change later in life – you keep should keep reviewing them every year and align your finances accordingly.
Losing out on the power of compounding
A lot of Investors (even the experienced ones) start saving later in life. They feel they have time and their whole life to save, let’s enjoy now – especially so because when you start saving in your early 20s you likely don’t have many financial responsibilities! This is the best time to save – as you can save at least half of what you earn and spend the rest.
The importance of starting early is the power of compounding and the key to accumulating wealth- a 20k SIP started at age 25, growing at 12% will become 46 lakhs by the time you are 35, it grows to 2 crores by the time you are 45 and if it continues uninterrupted till age 55 it will grow to be over 7 crores!
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