20s is a confusing time. You are simultaneously stressed about how your hair looks for the date and how your sales report looks for the boss. Relationships, living on your own, worrying about all the bills, planning finances, figuring out the long term goals, so many things have to be figured out for the first time. It is very common for the planning to take a backseat. I don’t want to advocate high savings rate to a new earner blindly. After all, you have just started earning, and it is natural to feel that you deserve some pampering. But it is also the perfect time to start small. Get yourself familiar with the world of investments and form habits that can build wealth long-term. You will find a lot of information online about what to do. But today I’m going to tell you five things which you absolutely should not. It will not just waste your money, but it might push you away from good financial habits long-term.
1. Borrowing
Never in the history of this world has borrowing money been easier. You can walk into a bank and get a personal loan on the same day. You can open up your phone and half of the apps that you have there will act as agents to lend you money. Getting a lifetime free credit card with a decent balance is a child’s play now. And it is only human to fall for the temptation just this once to refresh your wardrobe or possibly book the dream bike was just poster in your room.
But many times such loans come with harsh terms and heavy interest rates. A typical secured loan costs about 18%. Whereas most other lending apps will lend you money all the way up to 36%. At such interest rates over a five-year period, you might spend more on the interest than the loan amount itself.
Another factor to consider while borrowing is that you are in the early stages of your profession. The stability of your career is not defined yet. Once you marry yourself to a monthly payment, which is non-negotiable in any circumstances, you are forced to earn by any means necessary. That three month career break for a good internship? Not an option. A six months break for a certificate course? Not possible. Going for a higher degree? Not unless the loan magically disappears. When you are still figuring things out, it is very risky, not just from a financial point of view, to take on a long-term liability. Today, it is very common to switch careers every five to ten years. And such transitions are not smooth. A monthly payment will force you to prioritize money over everything else, possibly impeding your pursuit of happiness.
2. It won’t happen to me syndrome.
In your 20s you are the fittest you will most likely ever. You won’t need a walking stick in your 30s, but you will feel the age slowly creeping up on your body. And that’s just the regular aging part. If you live in a busy city with millions of vehicles on the road and jam-packed public transport, it is not a matter of if but when a disaster might take place. It is always best to be insured against two most basic things one is your life and the other is your health.
The first of which is life insurance. It will take care of your family after you. In your 20s, that would most likely be your parents and your younger siblings. If something happens to you, that money will go a long way in giving them a life of dignity. And initially stick to simple life insurance without any investment or savings options attached to it. In your 20s, your premium will effectively be just ₹800* per month!
The second is health insurance. While it is unlikely for you to develop complicated, chronic illnesses in your 20s, injuries and diseases arising from tightly, packed urban settlements do not care much about the age. A tumble from a bike can cost thousands in a matter of days. A typical mosquito borne disease will force you to finish your sick leaves in a month. Not to mention the cost of hospitalization if you need it. In such situations, a good health insurance will take care of all the expenses that arises out of it. For just a few thousand rupees a year, you can get a health insurance covering medical expenses up to 50 lakh rupees. Do you really need that much? Maybe not. But it is cheap enough to have it just in case.
Not to mention that as you get older, the premiums for the insurance increase. So it’s best to start early.
3. Not having patience.
Considering the trends of today, you will already know what cryptocurrency is. You may already know internet personalities who have allegedly made millions trading in them. There are dozens of apps giving you quick access to well over 1000 currencies most of which I don’t know the names of. Looking at some of the charts, it looks like it’s an easy way to make money. In a matter of days the currencies go from a few cents to hundreds of dollars. You may be fooled into thinking that just buying any currency that you see at low prices can make you rich overnight. But many of them are systematic market manipulation instruments. Well coordinated traders inflate the price of the currencies to profit from it while many common investors are left holding the bag when the eventual dump comes.
Investing in stock market has been easier than ever. Many broking platforms are actively promoting investing in high risk, small-cap stocks and IPOs. While there is some merit to this style of investing, it is also equally difficult to generate consistent high returns. I have seen more portfolios perpetually in red rather than in outstanding green. In an attempt to get rich quickly, you might forever lose the confidence in equity markets.
Instead, invest to be rich in 30 years, not 30 days!
4. Too much tracking
Just because you can see live valuation of your portfolio, does not mean you have to. It is perfectly normal for an equity portfolio to be in the negative long periods of time. You will want to click that sell button so that you don’t lose any more than you have already. But counterintuitively, it is actually a good time to buy more. And that is why we do SIP. We keep investing and stay the course.
If you look at historical charts of Indian markets or any market around the world for that matter, you will see many short-term fluctuations. In case of india dot-com bubble, financial crisis, taper tantrum, Covid are all the falls in the market where it felt like the market will never recover! But since then market has given exceptional returns, making people who stayed the course generational wealth. And what’s common in all of them? They don’t really care about what their portfolio does on a random Monday. They check their portfolio once every year. See if any changes need to be done and shut the folder for another year.
Just like a watched pot of milk never boils, an actively tracked portfolio never grows!
5. Favour of the day investing
There are over 6000 stocks listed in India. There are well over 2000 mutual fund schemes. Every bank that you see out there has fixed deposits. There are countless insurance linked schemes, which promise tax-free returns. Gold and silver are two metals which shine once in a while and attract fancy of many. TV channels come up with new high growth companies every day. Every single financial influencer wants to recommend good stocks for you. In fact, your broker terminal will give you a list of stocks for short, medium, and long-term without ever specifying what they actually mean by short, medium and long.
The simple conclusion, there are more options out there than any human being can reasonably comprehend. Many of them are not really relevant for you. Instead of chasing a new stock idea every day, you can invest in well diversified funds with proper asset allocation, and pursue better things in life like food and music.
These investment ideas are like “Flavour of the Day” at an ice cream parlor. The flavour of Tuesday may not necessarily be better than the Flavour of Wednesday, but the parlour will surely tell you as much. They want you keep buying from them every day! That is pretty much how the financial industry works. It pays to stay focused.
Which of these have you done before?