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Kolkata, November 3: Most of us start their first job in the 20s and it was no different for me. I started working at the age of 24. Interestingly, despite working for a personal finance magazine, managing own finances was never in the plan. I was the carefree soul who thought life would just move on like this. However, I was not all right.
Now in my mid-30s, I have become wiser and mature – both financially and in life otherwise. When I look back, I realise the major financial mistakes I made in my 20s and I so wish I could have avoided them.
While it is never too late to do a financial course correction, if I had not made these mistakes in my 20s I would surely be in a better financial position.
Here, I will share five major financial mistakes I made in my 20s and you should avoid them at any cost.
Not having a budget is probably the biggest mistake one can make.
It is the first thing that one needs to do and of course stick to it. A budget, basically, is a record of how you are spending your money. It also provides a guideline of how you should spend your money under different categories so that you end up having a surplus every month.
When you have a budget, you will know that you are overspending in some categories and then eventually curtail. In my 20s I would mostly live from paycheck to paycheck and since I did not have a budget I would never have enough surplus that I could save on a regular basis.
Another basic tenet of financial planning is that one needs to have an emergency fund which is 3-6 months’ of one’s average monthly expenses. The idea of an emergency fund is that it helps one to tide over emergency fund requirements like a job loss or a medical emergency.
Since I did not have enough surplus, I never got around to building an emergency fund. For this reason, on a couple of occasions I had to resort to high-cost personal loans.
In my 20s I would spend a large part of my salary simply on indulging. These included going out with friends, eating out, partying and also went on buying expensive gadgets when I really could do without one.
While one can make such purchases once in a while, if one succumbs to the temptation too often, it seriously affects one’s saving potential. It did not help that I bought many high end gadgets on EMIs, which meant that I also had to pay a lot of money as interest.
This brings me to my next point—high interest debt. I have already mentioned a couple of times I had taken a personal loan. These loans came at an interest of 17-18 per cent and repaying them put an additional strain on my finances. I also overspent on my credit card and though I tried to clear dues in full, every month, on a few occasions I could just make the minimum payment and hence ended up paying interest as high as 36 per cent per annum. It took me quite a while to get rid of these high interest debts as they threw my finances out of gear.
In my 20s I did not take retirement planning seriously. While you can start planning for your retirement even when you are in your mid 30s but if you start early you get the benefit of compounding.
Let us take an example. Let us say I wish to accumulate a corpus of Rs 5 crore when I retire at 60. In the first scenario I start saving when I am 25 years old. This gives me 35 years to save for retirement.
In the next scenario, I start saving for retirement when I am 35. In both cases the assumed rate of returns on investments is 12 percent. If I had started to save when I was 25, I would need to invest Rs 7,698 every month to reach my goal. Now, if I start investing at 35, I would need to invest Rs 26,349 to build the same corpus. This example shows how it is so important to start saving early!
These are some of the mistakes you can avoid in your 20s.