A Beginner's Rulebook to Avoid Mistakes in Investments

Young earners usually do not have many financial obligations which they can use to their advantage by taking higher risks while investing. But financial planning usually takes a back seat for the young earners and that is because they think that they have a lot of time to start investing. But they are unaware of the magic of starting to invest early or the benefit of the power of compounding. Being said that let’s look at some top solutions that should be adopted instead of making mistakes by young earners: 

1. Danger signals

Young earners should start building an emergency fund that will help them to keep going for six-nine months without getting a pay check. You need to have money to fall back on when you lose your job. People might have money kept in their savings account with the fear of exploring new income-generating options. One should invest in a liquid fund or ultra-short-term debt fund for such emergency expenses. This helps to have a financial buffer for emergencies such as medical or paying rent, insurance premiums, electricity bills, or any other financial emergency.

2. Spending less than your earnings

This may sound very boring and a basic idea. However, there are a lot of millennials who spend mindlessly on their short-term lifestyle goals which run up their credit card bills without any financial planning. Eventually, they might fail to repay their credit card bills by their due dates which can adversely affect their financial health. The sure way to stay on top of your finances is to spend less than you earn.

3. Not investing early

One should stop procrastinating financial planning for their retirement as it’s a very crucial aspect. Early investing for retirement helps to build a bigger corpus. Most of them delay retirement planning considering it as a distant goal but they forget that just a small amount of contribution towards retirement planning is very fruitful for the long term as it will help you build a higher corpus than starting late with the magic of compounding. 

4. Cover it up

Insurance is a very important part of financial planning. One should have pure term life insurance which should be at least 10 to 15 times of your income. Many young earners get confused between insurance and investments which would take them on the path of investing in money-back policies, endowment policies, and others. Term insurance is one of the best options to get adequate life insurance cover at low premiums. As premium keeps on rising with increasing age, it is a good idea for young earners to buy insurance covers at low premiums.

5. Mutual funds Sahi hai

For long-term wealth creation, mutual funds are a good option. It provides good diversification and allows you to customise options as per your needs. Young earners who are first-time investors can consider opting for equity mutual funds which allow them to invest in a basket of stocks as low as Rs 500 vs direct stock investing which requires expertise and good knowledge of investing. 

The author is Co-founder, Tarrakki

DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.