What are the Biggest and Worst Finance or Money mistakes:
I have observed many young people who are graduated recently or just getting into career started, are least bother about their savings and commit serious finance mistakes. They will realize in later stage, but results of these mistakes cost them seriously and heavily.
1. Not having Contingency / Emergency fund:
Many young people, whenever they receive their salary / income, they spend immediately and nothing will be in hand during month-ends. Just imagine if any Medical emergency or any other critical cash pressure occurs by the time!? You will borrow money from outside sources. Borrow money is the worst and top most financial mistake in your life.
How to prevent this mistake? Very simple, just maintain a Contingency or and Emergency fund which is equal to 6 months of your net monthly salary / income. One important tip here is, you keep this amount in any good Liquid fund, which will earn some interest on it as well and is readily available whenever you want.
2. Insufficient Life Insurance:
Most young people in India are easily lured when an agent tells about the returns from an Insurance policy. They end up in investing expensive Endowment Policies / Money back policies, resulting with insufficient Life insurance for them. For instance, a 25 year young person takes an Endowment policy for a sum of 1 Lakh, he needs to pay premium Rs. 10,000 approximately for a period of 12 years and at the end of 15 years, and he will just get around 2 Lakhs after maturity. During this insurance period if any thing happens to him, his family just receives 2 Lakhs only. Making Insurance is an Investment product is a second worst mistake in your life and because of this mistake, your family will hit very badly.
How to prevent this mistake? Just take a Term policy for the sum amount which is equal to 8 – 10 times of your Annual Gross salary. For instance, a 25 year young person, can take a term policy for 50 Lakhs for a mere annual premium of Rs. 5000. If he takes this policy from online, he may get 15% – 20% discount on the premiums. If any un-even event happens to him, his family receives Rs. 50 Lakhs which is very comfortable amount for them to live after then.
3. Insufficient Health Insurance:
Many young employees, particularly working in Private firms, think that their company is providing Group Health Insurance and that is enough for their medical needs. This is the next biggest mistake which causes dent to their pocket heavily during needy times. The current job market is very volatile and you cannot rest assure about your current job. You may change your job / or may loose your current job. During this transition period, if any medical emergency happens, your existing Group Health insurance will not protect you and need to pay the medical bills by your pocket.
How to overcome this mistake? You should have another Medical Insurance policy from the market for you and your family. Don’t bother about additional premiums you have to pay and it is worth paying. One more important tip here is, if your parents are there, you should not club into your Mediclaim policy, need to take Individual health policies for them. This will reduce your premium burdens.
4. Not defining financial goals:
Not defining your Long-term as well as Short-term financial goals is another biggest and worst mistake that generally young people do. They just invest into different products with out any financial goal. This will lead to choosing a wrong product for the goals and results insufficient funds for those targets.
How to mitigate this problem? Define your Long-term goals like your Kids’ education and Marriage, your retirement life etc. and attach with a good investment product for this goal. Like wise, you need to define your Short-term financial goals like Buying House / Car, Vacation etc. and to attach with a right investment product. Defining Investment product depends on the time frame and the financial target.
5. Investing in Debt Investments heavily:
Most of the young generation investing in Gold, Insurance policies, Bank FDs or Postal insurance products. All these are safest products, no doubt in that. However, these products will not yield inflation-beat returns also not that much tax efficient investment products. Finally, you will end up insufficient returns for your targets.
How to handle this mistake? You need to invest in Stock market directly or indirectly. If you have sufficient knowledge on stocks or if you have any financial adviser, you can directly invest into good stocks for long term. Otherwise, you can go for Mutual funds and invest through SIP approach for a long period. This will surely returns Inflation-beat returns in a tax efficient manner.
6. Maintaining many Credit cards and Over spending:
Now-a-days, young generation feel great to maintain more Credit cards and swipe them left-and-right. This is one of the Biggest financial mistake which leads to your financial journey in a bad condition. I know many people (especially Young software engineers) are using major portion of their earnings towards paying credit card dues and heavy interests.
How to overcome this mistake? You should keep only 1 or 2 Credit cards. Use them prudently and better pay cash payments that will reduce your unnecessary spending s.
7. Investing at Later stage:
Many youngsters feel investing is a senior people’s concept and do not think about investments or savings at their early stage. Suppose a 25 year person keep investing Rs. 100 per month in a good Mutual funds, can you imagine how much he can have by his retirement age? Just
1 CRORE!!!!!! That is the power of investing at early stage. Investing at early stage will have Power of Compounding and would lead to higher returns.
8. Investments are not Diversified:
You should not put all your eggs in one bucket. Many people investing their entire savings into one savings products like FDs, Gold, Real estate etc. This is not at all a wise idea and will not yield good returns over a period of time. During 2007 – 2008 times, many young people invested heavily in Real estate or Stock market. Post to 2008, the real-estate boom and stock market busted, and all these people lost their entire savings.
How to overcome this? Investment Diversification is the best medicine for this. You allocate your investment amounts into different Investment products. This would not only average your losses but also maximize your returns over a long period.
9. Financial Illiterate / Not having knowledge on Taxes:
How many of you know that Section 80C limit is increased to 1.5 lakhs? How many of you know the Section 24B (Home loan) limit increased to 2 Lakhs? I bet, only few people know these amendments in the recent Budget-2014. Saving Tax is equal to saving your money. Hence, every young person should be well aware of the current financial situation and the knowledge on the Taxes imposing on their income. Then only then can manage their taxes efficiently.
10. No revision on Financial planning:
This is last but not least Biggest mistake by young people. Many of you are just invest into one product and will not look back about the progress of the returns from this investment product. That is not at all advisable. Every person should review their investment portfolio at least twice in a year and should do modifications accordingly. It is better to take advises from an experience financial advisers.