When you are in your 20s and just started earning your own daily bread, financial planning or saving for contingencies might not be the first thing on your mind. However, as time passes and you walk into the next phase of your life, becoming financially responsible is no longer a choice but a necessity. Taking the right financial steps in your 20s will set the stage for your financial success later in life.
The first step would be building a good credit profile. As soon as you get a stable job, you should apply for a credit card and use it responsibly to build your credit score. Nowadays, financial marketplaces like Paisabazaar.com have made it quite simple to get a credit card. You can compare credit cards from multiple issuers on a single platform and apply directly without any hassle.
In addition to building credit and preparing yourself to avail bigger loans like home loan or car loan at competitive rates, here are some common mistakes that you should avoid in your 20s.
- Not Saving for Emergencies
COVID has given a good glimpse of how life could be if the world came to a halt. Emergencies, whether on a global level, or personal level such as an accident, loss of job or any unfortunate event can push you into deep debt. This is why it is important to plan for unforeseen circumstances. You should set aside a small portion of your monthly income in a savings account or in a liquid investment instrument, as you will need to withdraw the money immediately.
- Not taking insurance
We hardly think of buying an insurance in the 20s for two reasons- 1) We think we are healthy and no health emergency will strike soon, and 2) we have no dependents. However, accidents and other unfortunate incidents can happen anytime and all your savings can vanish in a single hospital bill. This is why it is important to take a health insurance and a life insurance. Moreover, if you take insurance early in life, you can enjoy the benefits of a lower premium.
Life insurance and health insurance are also helpful in savings taxes as the government offers some exemption on the premium paid.
- Borrowing for Discretionary Expenses
Since pre-approved loans are easily available nowadays, you might think of borrowing a sum and going on that trip you always dreamed of, or buy that expensive gadget which has always been on your wishlist. However, borrowing comes with a cost, that is, interest. Personal loans are usually among the costliest forms of borrowing resulting in a considerable pay out in the form of interest. It is always advised not to borrow money for discretionary expenses that can be avoided. If you do avail a loan, have a proper repayment plan in mind so that you do not have EMIs that go beyond your monthly budget.
- Impulsive Buying
When you have just started earning money, the sense of financial independence can sometimes be overwhelming. You might think of splurging on clothes, footwear or accessories, frequently dine out or go to the parties, give expensive gifts to friends. Such impulsive purchases can lead to regret especially if you have put everything on a credit card and cannot afford to pay the total amount when due. Hence, you should always set a budget or at least have a rough amount in mind that you can assign to unplanned purchases like these. It will help you better manage your finances as well as imbibe financial discipline in you.
- Neglecting Investments and Tax Planning
Investments may seem like a too grown-up topic when you are in your twenties but they are a great way to put your surplus money to good use. You do not need to invest a lot initially but you should at least start investing a little sum every month. You can choose to invest in low-risk mutual funds or, if you have a high risk appetite, go for high-risk MFs or stocks. Maintaining a balance is quite important when it comes to investments. Have a clear idea about how much money you can spare every month for investments and then divide it into high-risk and low-risk options.
Moreover, as your income grows year-on-year, you should find ways to get tax exemption by investing in PPF, NSC, NPS or tax-saving FDs. Most of these options come with a lock-in period but they will be quite helpful in saving taxes.
Make smart decisions, take calculated steps and avoid making the above mistakes. Being financially disciplined early in life will prepare you for financial success.
Also Read: How to track your tax return?
