6 costly financial mistakes every young investor must avoid
The early years of my career are so much memorable. Every day you learn new things, make new friends, and well, receive that salary cheque. That feeling of independence is awesome, right?
But with the income that you earn also comes the responsibility to save & invest wisely. And wise saving & investing is possible only if you avoid costly mistakes.
In this post, we share with you the 6 most common financial mistakes that every young investor should avoid.
Mistake # 1: Not spending time learning about personal finance: Our education system is that it prepares us in different ways to earn money. But the sad fact is that it does not teach us anything on how to manage it.
We may curse our education system, but a wiser option is to spend dedicated effort in learning how to manage money. The internet is filled with resources on how to manage money. Only your commitment & time is needed.
Personal finance is a skill that pays handsomely over time. If you choose to learn it yourself, you’ll never have to again depend on someone else for your money decisions.
And if you don’t, your entire life you will get tossed over by conflicting suggestions, invest in wrong products, & mess up your peace of mind.
The choice is yours.
Mistake # 2: Not controlling your spending: Salary credit. Joy. Party with friends. Personal Loan. New I-phone. The shared pic on Facebook. Likes. Joy. End of the month. Bank account empty. Sad. Salary Credit. Joy.
As a young investor, can you relate to this cycle, don’t you.
This is fine for the initial few months of your first job. But then, many young earners just don’t come out of this cycle. Over a couple of years, in return for a few thousand likes, you get zero savings, a mountain of personal loans & credit card debt. In short, a pretty messed up financial life. How good a deal is that?
To save yourself from this consequence, you need to set some rules as follows:
First invest, then spend. Set up automatic investments in the first week of the month.
Make a budget and stick to it. Get into a habit of writing your daily expenses.
Make a splurge fund. Save ahead for big expenses like iPhone. Say no to credit cards & personal loans
Mistake # 3: Starting late in saving & investing: Ask any investor in his 40s & her biggest regret is – I wish I would have started saving early!
First few years of your job set up a strong foundation for your financial structure. Mostly, people just let these years go by for one simple reason – “Nobody told me where to invest.”
Wealth creation is not about clever investment strategies at all. It’s about the discipline of starting early, saving & investing a reasonable amount every month, & let the money remain invested for a significant duration of time.
So, the most important thing is to START. You can pick one ELSS fund for tax saving and a liquid fund for parking your savings. Set up SIP and start investing. As you move ahead in your investing journey and build your knowledge in personal finance, you can definitely make course corrections & further refine your investment plan.
Mistake # 4: Sticking with “safe” investment avenues”: A lot of young investors invest in “safe” investment avenues like fixed deposits, traditional insurance plans, gold etc. This is like expecting someone like Cheteshwar Pujara to single-handedly chase a 200+ score in a T20 match.
These safe avenues have a role to play, like different players in a team. However, putting all the money in these avenues is actually risky. Why? Because the returns do not beat inflation. And when the financial goal is due & you are in need of money, you realize that it’s just not enough!
To avoid this, decide on a proper asset allocation. This means breaking up your investment between high-return asset class like equity & fixed-income investments. This will allow you to let your money grow at a rate higher than inflation. And that will help you meet your financial goals & create real wealth over the long term.
Mistake # 5: Consulting wrong people for financial advice: When you are not focused on your finances, you make random people your financial advisors. Mostly these are office colleagues with who we hang out most of our day. The person who is giving you well-meaning advice may himself be clueless & have got it from someone else. And this results in herd investing.
The problem with this is that wrong advice doesn’t cost a penny to the one who gave it to you, but costs you A LOT. Oftentimes, one realizes the damage much later in life, when it’s too late to rectify.
The solution is to devote time to do your own research. The more you do your research & develop your critical abilities, the less you need to depend on others for advice.
Mistake # 6: Falling for hot stock tips, F&O etc.: A lot of young investors fall into the trap of getting free Demat accounts, investing blindly in hot stock tips, trading in futures and options, cryptocurrency, and whatnot. Some even lose their entire savings in the process & reach the brink of committing suicide.
Know this: Such activities are speculation, not investing. And it requires a different level of skill and temperament to earn money from speculation.
Investing is a slow game that requires patience. There is no excitement in that. Don’t put your money on the line on something that you don’t understand.
The road to wealth creation is not a 100m dash. It is a marathon. Along the path there are many temptations to quit & relax. However, you need to steer clear of those mistakes. And this will come when you keep your focus & develop your knowledge on personal finance.
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