Money traps to avoid in your 20s to set yourself up for success in your 30s

 


Financial literacy was never taught in school. It feels to me that this is THE most important skill that we should be teaching kids. The way we manage money is the single most important skill that can make us wealthy. So am putting down this post basis what I have learned through years of scouring financial websites, podcasts and my own experiences.

 

Buying too much car

As you start entering the workforce, it is but natural to compare yourselves with your peers. Compare yourself however on the right things, cars are not one of them. Your peers may be buying big cars that seem out of reach for you. Remember, it is possibly out of reach for them too. Banks will be more than happy to give you the maximum loan they can. I would recommend spending not more than 10% of your entire net-worth on a car. A car should be looked and evaluated only as a safe transportation option. Do not get into the trap of buying an expensive car and moving backwards in your financial journey. Save up and pay cash for it.

 

Buying too much house

While most may not consider buying a house in their 20s, it is definitely wise to start saving up for a down payment. A home loan is the only type of loan, I would say is acceptable. I personally believe in saving up and paying cash for a house too. However, I understand that may not be feasible. A rule of thumb to work towards how much house you need is to set up a loan in a manner where the EMI is not more than 25% of your monthly take-home at a fixed interest rate (not floating) for 15 years. Dave Ramsey, one of my favourite financial gurus explains this well here. Although he is US-based, the advice travels well. If either you or your wife temporarily isn't working for 3-6 months. You should be able to support the EMI and your living expenses on 1 salary till the employment situation improves. Don't go overboard on furnishing the house either.

 

Spending too much while going out

Two key types of socialising are what you have to work through - Office and Friends. As you join a new organisation, you may find yourself under pressure to attend the post-work social events. I am not advocating to not go for these, but just remember you are not obligated to attend these events. 5 years from now, nobody's going to remember whether you came to an event or not. They are good networking opportunities and should be treated as such.

 

With friends, you would have a lot more leeway in the breadth of activities you can do. Being candid and layering your suggestion with humour is something that your friends will really appreciate. In my experience, it opened up a breadth of activities I wouldn't have the opportunity to experience. Like going for a free museum tour instead of expensive drinks.

 

Credit card debt

The lure of the rewards are real, there are plenty of cards that entice with you great rewards. However, don't go overboard on the credit card. If you feel that your expenses are spiralling out of control, please cut up your credit cards and use a debit card. Credit card interest is about 30%-40% when annualized. Credit card companies are just loan sharks in suits and should be treated as such. Would you wine and dine a shark? Possibly not.

 

Term Insurance policy with savings/returns

Please stay away from ULIPs and endowment policies. I am sharing this from my personal errors. I had gotten a retirement endowment policy from a leading insurance company. The thought being - hey I am going to never see the insurance money so might as well get a savings linked policy. I couldn't have been more wrong. Endowment insurance policies have a high lock-in period and generate sub-standard returns. If the lock-in period is high, you should have equity exposure and generate 11% returns. Most endowment policies can't even beat inflation. Insurance is a risk management tool, it is to protect your loved ones in an unfortunate event. Just simply get a term life policy with no savings/returns linked to it.

 

Having Health Insurance only from the company you work

Get private health insurance in addition to what the company offers already. Insurance be it term or life is a risk management tool. Health insurance will protect against the financial costs of a health problem. These are extremely useful when you are switching jobs, taking a break from work. If you start early, these will be pretty cheap.

 

Not budgeting

Get on a budget, and see where every rupee is going. See if it is adding value to your life and accordingly adjust for the next month. Budgeting is an important life skill that will add a lot of mental peace to your life. Personally, I have experimented with a couple of ways and have finalised right now on the goodbudget app

 

Not investing

The biggest regret I have is not starting investing sooner, I started when I was 27. Whatever your age, you must start investing as soon as possible. Read up on the power of compounding, deciding to take action now vs a few years down the line would mean a difference of 2-3 times of the money you would have in the future.

 

Following these steps are a sure-fire way to set yourself up for success in your 30s. What do you think about these? Let us know in the comments.


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