Good planning is essential for effective money management. Read on to know more.
When young and single, you generally tend to have a lot of time and money at your disposal as there are no financial obligations and family responsibilities. However, with time and progression in your life, the financial situation changes. Therefore, you need to have a sound financial strategy in place to avoid any kind of future trouble. Once you are married, the financial goals should also be that of your partner’s. Even if you haven’t figured out a sound strategy, it’s crucial to avoid making small financial blunders that may haunt you later on in your life.
In this article, we list financial mistakes to avoid when young:
Thinking There’s Nothing To Plan
When we are young and don’t have much liabilities, we don’t think of planning our finances. But a financial plan is a must to have clarity of your goals and commitments. It need not be a sophisticated one with a professional planner, but you must plan a monthly budget and try to follow it.
Similarly, you must be aware of your investments for your goals. Understand how much money you will need for retirement and plan for this. You may think this is too early, but not having any idea about your financial situation and plans can be quite disastrous later in life.
Credit Cards Burning a Hole in Your Pocket
Many youngsters opt for multiple Credit Cards. While Credit Cards are designed to simplify your life, most often multiple cards lead to poor money management and possible debt traps. Many also do the cardinal mistake of not checking their monthly statement as you may not be aware how much interest your bank is charging you in excess if at all.
Another card related mistake often made by youngsters is only making the minimum due payment. Many youngsters get exhausted with their money close to month end, and just pay the minimum amount on the due date. This way, the cardholder is actually attracting huge charges on the dues, which can sometimes go on for years, leaving you with huge debts. To top it your Credit Score gets vastly affected impacting your chances of securing future loans.
Not Having an Emergency Fund
An emergency fund is crucial, as you cannot predict when you will have a financial need. A contingency fund should be put in place as soon as you start earning. Even if you cannot set aside a large amount, a fund should gradually be built over a period of time. Usually, 6 months of expense is considered to be a good amount as an emergency fund, although this may vary from case to case. When you ignore this aspect, your finances are open to risks, and you may have to dig into your long-term investments to finance emergencies.
Not Having Adequate Insurance Cover
Having sufficient Life and Health insurance cover is another important part of financial planning. The quantum of life cover you need would depend on your age, liabilities and dependents in your family. Similarly, the amount of health cover you need would depend on the number of members in your family, history of diseases, place of residence, presence of a secondary health cover and your age. Not having an adequate life and health cover is another way of exposing yourself to risks, thus making your investments susceptible to this.
Considering Insurance and Investment to Be Same
A common mistake made when you are young. Combining an insurance plan with investments is a sure shot recipe of eating up your money in the form of expensive charges and fees added by the insurance company. Besides insurance plans even if they are endowment plans look attractive on the onset, but may give you far lower returns than estimated. It is thus always advisable to separate insurance and investment.
A pure term cover is recommended over fancy insurance products which promise high returns. For investment on the other hand resort to other schemes like Mutual Funds and ELSS which give you better returns.
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