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5 common financial mistakes which young professionals usually make - Outside View by PersonalFN
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5 common financial mistakes which young professionals usually make
Jun 14, 2014

Graduating out of college and getting that first job are a few of the life changing events of our lives. Moreover, receiving that first pay cheque is a moment of joy and pride for everyone. Many prefer to spend this hard earned money the way they want and have the time of their lives.

However, it is imperative to be in control of your finances. Very often with aspirations of having a car, buying a dream home, etc. today's youth often take loans. But it is vital not to go overboard. You see, landing knee deep in debt and ruining your finances is not an overnight process; but a function of how disciplined you've been in the past and the control you resorted to. The financial decisions you take in the initial working years of life will have a huge impact on your life time savings and finances. Hence the early years of adult life are the most crucial ones as far as money matters are concerned. Whether you are free of any financial responsibilities or need to contribute to the household expenses each month, there are some big financial mistakes that you must avoid making.

For your convenience, at PersonalFN we have listed down 5 most common financial mistakes that young professionals often make:

  1. Being reckless about loans:

    At this juncture when you have started earning, you might be contemplating about buying a car or a house for yourself. If you are planning to opt for a loan for fulfilling these goals, then it is extremely important to be careful while doing so. You must take a loan, only if you can afford to repay the same. Many young adults find it difficult to repay their obligations or other expenses after taking loans and live from pay cheque to pay cheque to make ends meet. This often results in them hardly saving to make productive investments. Let's say if you already have an education loan taken for higher studies and are paying Equated Monthly Instalments (EMIs) thereon, you shouldn't be indulging in any fresh loans until you have completely repaid the education loan or the liability has been at least substantially reduced. Remember, being reckless while taking loans can be a burden on you and may land you in a debt trap.

  2. Not making a budget or saving:

    Many young adults use their monthly salaries recklessly for fun. While it is good to spend on leisure occasionally, it is imperative for you to understand that it is also very important to work on a budget. You must keep a track of your regular income and expenses and cut down on unnecessary and extravagant expenditures. This will help you to achieve your life goals such as higher education, buying a home, saving for retirement and so on. Budgeting your daily expenses is not a very difficult task. For instance, you need not spend too much on outings, buy the most expensive laptop or mobile phone and you can easily do with a cheaper but efficient car. You see, while you are young and have no financial responsibilities, you can easily save a large portion of your monthly income. It is noteworthy that as one grows older, the number of expenses also increases exponentially. Hence right now is the best time to save the maximum amount you can. It is also important to save a portion of your income for emergencies. Having a contingency reserve will enable you to deal with any unforeseen circumstances that life throws at you such as loss of job or family emergencies.

  3. Thinking of retirement as a distant reality:

    Agreed, you are not going to retire any time soon but it is extremely important that you start planning for retirement from an early age. The longer you delay saving for retirement, the lesser you will be able to accumulate for the golden years of life. You must let the power of compounding work on your hard earned money to meet the necessary corpus required for retirement. Without planning or working towards retirement, it would be difficult to even maintain the same standard of living that you enjoy today, leave alone improve the quality of life in your later years. It is important to calculate the corpus you would need post retirement (keeping in mind medical emergencies, rise in the cost of living etc.) and then save for the same on a regular basis without fail.

  4. Not insuring yourself:

    While it is good to be optimistic and even resort to a healthy lifestyle, life is very uncertain and unpredictable. Even though you are young and might be in the pink of health, having an adequate life and health insurance cover is mandatory. The earlier you take insurance cover in life, the lower the premiums will you have to pay. Accidents and disabilities can render us incapable of earning any income for a long time or even throughout our lives. In such scenarios, having an insurance cover can enable you to meet the medical and hospitalisation bills without becoming a financial burden on other family members. Also, remember that having any insurance policy wont indemnify you against risks. You need to have the right amount of insurance cover and the right policy so as to protect yourself from financial losses or uncertainties. At PersonalFN, we believe term insurance policy is the best while safeguarding your family's financial future and you should never mix your investment and insurance needs. They should be dealt separately.

  5. Making ad-hoc investment decisions:

    Being young gives you a very important advantage - "time". Investing your savings in the right investment avenues can make them grow and meet all your financial goals in life. Being young, you can afford to invest a large portion of your savings in risky asset classes such as equities and real estate. However it is important to consider your time horizon and risk appetite while investing. You must never invest your savings without proper planning or based on irrational 'tips' from friends or relatives. Making ad hoc investments can erode your savings and create a mess of your finances.

PersonalFN is of the view that if you avoid these common mistakes from the early stage of your career, attaining financial nirvana will not be a faraway dream. We believe that in order to achieve your objectives, in an organised and structured manner, it is important to construct a goal based financial plan. We understand that not everyone has the qualifications or time to prepare a financial plan. Hence you must never hesitate to seek help from qualified and unbiased professionals for the welfare of your finances. Investing in the advice of an expert is not a waste of money and could lead your portfolio to the right track from the beginning.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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