5 Money Mistakes To Avoid In Your 20s

By | June 10, 2016

5 Money Mistakes to avoid in your 20s

Life in your 20s can be thrilling and exhilarating, to say the least. Being financially independent, especially, is quite a heady feeling. It’s a time of enormous growth and awesome opportunities, but you can also make a few mistakes which might haunt you in the coming years. But fear not, we are here to help you through the tricky decade that’s your 20s. We tell you how to avoid the 5 common money mistakes that people make in their 20s.

Following a Budgeting Formula

Unless your family stops supporting you financially, you don’t really understand the importance of savings. Fending for yourself on a fresher’s salary in a big city is a big eye-opener to why you need to save! One formula you can follow to save your money is the 70-20-10 rule. However, we suggest that you follow the 50-30-20 rule if you want to build up savings for your future. Early birds get the best out of compounding. Let us elaborate:

50% for living expenses (rent, food, clothing, utilities)

30% for savings and investments, which is then divided to 3 parts:

  • 10% for investments (FD, mutual funds, stocks)
  • 10% for your emergency fund (FD or Liquid funds), until it is built
  • 10% for specific goals (vacation, new gadgets, investments)

20% for debt (car loans, credit card bills, house loans)

By no means is this formula the only way to save up. But, it’s a good way to get you started. Feel free to explore and create your savings plan based on your needs and preferences. But save, you must.

Keeping an Emergency Fund Ready

If you think that you can breeze through life without ever needing an emergency fund, think again. Life is full of surprises and you never really know when you’ll need to break open that piggy bank. An emergency fund gives you the comfort of knowing that even if something critical comes up, you have some funds in hand to help you while you get back on your feet. Ideally, you should have 3 to 6 months’ worth of your monthly income saved up in an emergency fund. Start by building your emergency fund through a Recurring Deposit (RD). Once you have the lump sum, shift it to a Fixed Deposit (FD). This way your money will keep growing. Ensure that you link the FD to an auto-sweep account. You could also consider investing in Liquid Mutual Funds.

Saying No – to yourself

Hard to resist the siren call of temptation, isn’t it? Well, giving in to sales and seemingly great deals can make your money disappear right in front of your eyes. Instead, spend on what you need, not what you want. A good idea would be to set aside a small sum every month, and we emphasise on small, so that you can spend on something you fancy, but keep a tight rein on yourself to not overshoot the amount.

Paying Credit Card Bills on Time

Getting a Credit Card seems like the final step into adulthood and flashing your card here and there can be fun. But these cards can also burn a big hole right through your pocket if you’re not careful enough. Always pay your Credit Card bills on time and in full. Don’t take the path of paying the minimum amount due as it would only pile up ridiculously high interest, pushing you into Credit Card debt.

Not Just Saving, but Investing and Retirement Planning

Plan for your retirement. Yes, you heard us right. Retirement planning needs to be started as soon as you embark on a job with a decent salary. You might not even be able to think that far ahead, but it’s important that you do. If you start in your 20s, you have the luxury of time. You can start with putting aside small sums now which will earn greater returns over time.

Additional Reading: Invest Young, Retire Early

It’s not enough to just save money, you also need to make sure that your savings grow enough to beat inflation. You must aim at building up an investment portfolio with a good mix of low risk and high risk products.

Okay? Cool!

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