What NOT To Do When Starting Out
The early years of an individual's career and investment journey are crucial. It is a period where responsibilities are few. There is significant scope for investors to set themselves up well for the future. But it is also a period where they are prone to making a variety of mistakes. A lot has always been said about how young investors can start investing. But very little is said about mistakes young investors make and how to manage them. So today I am going to talk about common financial mistakes that young investors are prone to commit. I will also show how they can be managed.
New investors who have just level that they feel is significant. They tend to presume that the size of their paycheck dictates the need for investments and money management. But this is not true. The process of investing and managing money should begin as soon as one has an earned income.
The focus in the early years should not be on the absolute amount of income or investments. It should be on the broader process of investing and managing money.
Young investors must focus on developing the right saving and spending habits. Inculcating the practice of saving at least 10% of take home income would be helpful. This would help build a reserve to deal with unexpected expenses. Increase in expenses must remain reasonable over time. Keeping discretionary spending to a minimum helps achieve this. Finally, the choice of investment products is also key. This is another area where young investors tend to go wrong. They may look to purchase every investment product that they find or hear about. This is especially true when the products are offered to them by various financial intermediaries.
Young investors must realise that they don't need much once they have a few basic products in their portfolios.
These products would suffice the needs of the investor during the early years of their career. Other products can be considered once their needs become more nuanced. Most financial products in India are aligned to serve the seller's interests. But the end investor would have very little to gain from such products. They would neither be cost effective for the investor, nor achieve their advertised purpose. They therefore contribute very little to the financial well being of the young investor. Learning to say no to pitches for investment products is hence a vital skill that young investors have to develop.
Today most youngsters have significant earning potential, translating into substantial incomes. Ease of access to credit has increased. This has seen consumerism become rampant in society. Most youngsters tend to lean on debt to fund their big ticket purchases. And most such purchases tend to be of depreciating assets. Major examples include electronic gadgets, vehicles and other material possessions. This is highly injurious to the financial health of youngsters. Even more so in the early years of their careers. Youngsters must look to avoid debt of all sorts when they begin earning. This is especially true during the first five years of their careers.
Any loans taken to fund their education must be paid off as soon as possible. Depreciating assets and material possessions must never funded through debt. They must only be funded through savings and purchased entirely in cash. Home loans can be availed of only when other basic investments are in place. If debt is taken on, EMIs must not affect investments for other financial goals. The way debt is handled can therefore be a major determinant of a young investor’s well being.
Simplicity is key for young investors during their first few years of their investing. They must refrain from making decisions that are too adventurous or impulsive. They must also not focus too much on saving taxes and handsome returns. Because there is no 'next level' with regard to money management. The focus must rather be on doing the right things consistently over time. This allows them to build a solid financial foundation very early in their careers. And that would set them up well to meet more nuanced financial needs in the future.