Financial Mistakes by Young Earner

I got my first job when i was 23 years old. I spend my first salary buying some relevant and many irrelevant things. I carelessly spent  90% of my first salary in the first week only. Same thing continued for next 4-5 years.February was my favorite month and Salary Credited was my favorite message. Most of my friends had a heavy bank balance at the end of three years especially girls. I was little envy of them and wanted to have bank balance greater than them and at the same time i didn't want to cut my expenses & excursion.

Time passed like a blink of eye and I shifted jobs. When i had to buy a home I realized my mistakes and power to saving money early in life. I realized my mistakes and i think most of young earners commit same mistakes.

Financial mistakes which every young earner should avoid:-

1. Overspending - Early life seems like a party when you want to have it all. You spend carelessly and save little because you think that you have entire life to save. So don't blame on the earnings which prevents savings. Blame it on those parties and gadgets that you indulged in which ate away your earnings leaving nothing for investment. In short think twice before spending and analyze whether you really need this or not.
     
2. Not Saving Early - Common mistake which we all do is not saving early in life. You should save at least 10-15% of our salary when you start earning. As salary increases this may go to 50% of your salary. Take away point is "You Should Save" when you are young. I will explain it with an example.
   
   Say, four individuals – A, B, C and D, aged 25 years each, are asked invest Rs. 5000 per month till they reach 60 years of age. They are given the choice of timing their investments. A starts his investments immediately while B delays it by 3 years. C delays his investments by 5 years while D starts investing after 7 years. Their respective corpus at age 60 would be:
   
   
   A slight delay of 3 years caused B to lose about 1.5 crore in long term  This is the power of saving early, money invested works to generate more money. Later you start investing, the smaller your corpus would be.
     
3. Use of Card - Whether you realize it our not, use of debit/credit card is a major factor for unnecessary expenditure. When you pay in cash you get a feeling of spending money but swiping card is easy and you don't feel like spending, until you see bank statement. You should pay using cash wherever possible to restrict overspending. If you are getting some offer or discount then you should definitely use it. To realize the pain of losing money you should use cash. I call it demonetization of cards.
   
   EMI is in fashion now a days and should be strictly avoided. Simple rule is,  if you have money then buy it else avoid, rather start saving for that asset.
     
4. Not understanding difference between Saving & Investing - Many new investors don't understand that saving money and investing money are entirely different things. They have different purposes, and play different roles. Saving money is the process of putting money aside and parking it extremely safe. Investing money is the process of using your money to buy an asset that you think has a good probability of generating good return over time. Savings will never get you rich but investments can.
   
   Saving relates to money in Bank account, FD and RD. Yes, FD and RD are not modes of investment, they are mode of savings as post tax returns are not enough to beat inflation.
   
   Investing relates to Mutual Funds, Stocks, PPF, Real estate, Gold or anything which you think has potential of giving high returns post tax.
   
   Thumb rule is Post Tax Returns should beat inflation.
     
5. No knowledge of financial products - As a young earner you never worried about understanding the financial products. Only thing you worry about is saving tax which is wrong. You need to understand financial products, Equity, Debt, Tax Saving and Insurance.
   
   Most of young earners buy LIC policy to save Tax which should be avoided. You should not mix insurance and investment.
   
   For insurance you should have Health Insurance & Term insurance. For investment you should have a portfolio with both Equity & Debt. For Tax saving you can have PPF & ELSS. Stay away from ULIP or any endowment policy. You need to understand where you are investing and most importantly for what purpose. It's your hard earned money and you need to be serious about it. I will cover this topic in detail later.
   
   Diversification across assets is important as it creates a balance between different investments.
     
6. No Financial Plan - Financial plan, what is this? You may not heard of this. Financial literacy is very low which results in a lack of financial planning. As such individuals don’t have any objective-aligned financial strategy which results in haphazard investments and lack of disciplined investments. Some common traits found in young investors include:
   
   - No financial objectives
   - Undisciplined investments
   - No long-term perspective in investments
   - No financial strategy
   
   A goal-aligned investment is the only approach for a financially free life which, sadly, is a very common oversight in early stage investments.
   
   Please leave your comments.