Photo courtesy Karolina Grabowska on Pexels.
Many of the young professionals who have just started working are happy that they are getting a salary and don’t have to depend on anyone for money. Since it is their own money they don’t feel like they are answerable to anyone for the expenditure they make. Previously they were dependent on their parents for their expenses and many times had to give an account for the money they were spending before getting more money. Most of the families in cities are nuclear families and the young professionals don’t have much responsibility. They feel that they have just started to enjoy their life and are too young for making financial plans. This is where they start making personal finance mistakes that can make them regret for the next few years. A person should know where they are going wrong so that they remain financially strong. The personal finance mistakes that young professionals make are-
1) No monthly budget-
Young professionals work the whole week and wish to enjoy the weekend. After all, they have slogged to get their educational qualifications in such a tough learning environment. Now is the time to enjoy. There are no responsibilities. Who has the time to think of saving money and preparing a budget? There is a whole life ahead to think about saving money.
This is where they make a mistake as the budget guides us on how much money can be spent for the month. The budget should be prepared at the beginning of each month and lets us control our personal finances.
2) Spending more than what you earn-
There is no budget and the person spends much of the money on rent, food, and entertainment. Eating out many times a week and spending a great amount of money on entertainment leaves a person with no money at month end and they end up surviving paycheck to paycheck. Sometimes when they are in need of money they borrow from their friends or take the help of a credit card. Such a situation can be avoided if a person is financially disciplined and lives within budget.
3) Falling into a debt trap-
Taking on debt and spending on things that you like is very tempting. Most of the lenders pack debt in a very attractive way and due to their marketing strategies the youth fall for it. Taking unnecessary credit is a very big problem that young professionals should refuse as it can lead to a lot of stress later on. If a person falls into a debt trap early in their carrier it becomes difficult to bring their personal finances on track easily. The best way out of this is to avoid taking unnecessary credit.
4) Paying full rent-
In a metro cities like Delhi and Mumbai people are expected to spend around 30% of their salary on housing rent. This is one of the biggest monthly expenses for individuals. When an individual is not married they can share the apartment and it can be with 2-3 individuals. This would save much of the expenses on rent and the money could be utilized for a better purpose.
5) Too many credit cards-
Recently I saw a youth having six credit cards. What is he going to achieve having so many credit cards, I did not understand? In fact, I warned him not to miss any payment otherwise he would be in big trouble having so many credit cards. Interest rates on credit cards in India work out to be between 2.5% to 3.5% per month. Going for drinks and dinner regularly with friends is fun but paying it all with a credit card and missing a payment is not all that fun.
The credit card companies keep making calls to the youth and tempting them by offering free credit cards. Owning a credit card is not bad but you should make complete payment on the credit card in full on or before the due date. Interest is charged when a person rolls over the outstanding amount to the next billing cycle.
6) No emergency fund-
When individuals start working they should start saving for the emergency fund which could be 6-9 months of their salary. The emergency fund should be readily available when you land up in an emergency. It could be in a saving bank account or money market instruments. The emergency that can arise can be like medical expenses, car repair, home repair, etc. Most youngsters don’t save in the emergency fund and are dependent on their parents and when the need arises may even use credit cards which are costly. When you lose your job the emergency fund will be of great use until you find a new job.
7) Ignoring credit score-
The credit score is based on the credit history of a person and depicts a consumer’s creditworthiness. When the score is higher the borrower looks better to the lenders. It plays important role in helping leaders take decisions on offering credit.
When you ignore your credit score and it becomes bad you find it difficult to get the loan approved or it may be at higher interest rates. People with lower credit scores have a higher chance of getting their credit card applications rejected.
Some lenders reward people having higher credit scores by waiving their processing fees and other charges. This can be significant money in big loans. In personal loans or home loans, the lenders try to offer borrowers from other lenders with lower interest rates in order to entice them to switch over to their financial institution. The borrower can in this way reduce their interest cost. It is always better to have a good credit score which helps in the end.
8) Investing in depreciating assets-
There are millions of cars sold every year. It is not very difficult to purchase a new car even if you don’t have the full amount as you can get a loan. But the car is a depreciating asset which means its value would come down over a period of time and on top of that you have to repay the loan amount.
In the same way, people buy other depreciating assets like bikes, electronic gadgets, and expensive clothing. Admitted that you are young and want to make a style statement but investing in appreciating assets like land, stocks, gold, and bonds is much better as you get back a much higher amount after a few years of investment.
9) Not having long-term financial goals-
A person should always have financial goals in mind in order to progress. Without a financial goal, the path in life is haphazard and you don’t know how to reach the destination.
Short-term financial goals are to be achieved in a short period and include establishing a budget, creating an emergency fund, and paying off your credit card debt. The long-term goals can be achieved over the decades and can include buying a dream home, higher education for the children, and investing so as to have enough money for retirement. Personal finance is related to having proper financial goals.
These are the personal financial mistakes that young professionals make. When they get over these mistakes they would be able to make their future secure by prudently saving and investing money. A good financial advisor would be able to guide a person in making investments and help in planning and achieving long-term financial goals. Personal finances are to be handled with maturity in order to progress in life.