Handling money is a tricky subject. It’s an important skill to learn especially when you’ve just started earning. You may think that you are doing the right thing by making that investment into land but then you don’t have sufficient liquid cash in hand to meet daily expenses…You may think that buying a new car on EMI is a smart purchase but you fail to realise that if doesn’t suit your financial health then you’re only building up your debts.
The world of finance is exciting with lots of opportunities coming your way but if you’re not financially literate, then decisions made by you can have disastrous outcomes. So let’s become aware of some common mistakes to avoid…
Saying goodbye to budgeting:
Budgeting is all about planning your estimates of income and your expenses for a certain period. It’s a very important tool which is often overlooked by many simply because it requires investment of time and a commitment to follow it as far as possible. Without it, you may not be aware of your financial health due to which you may not leverage the investment opportunities to the maximum and you may also not know about your mounting debt before realising it’s too late.
Framing and abiding by a budget has many benefits such as:
- It keeps you updated on your financial health and helps you take conscious decisions.
- It builds the right financial habit and the financial discipline for you, which will go a long way in not just increasing your finances but also securing them.
- You become aware of your income status, the amount of expenses required, and the debt status and accordingly help you to focus on increasing income, reducing expenditure and clearing off debts.
- You wouldn’t be confused or anxious while framing a bigger budget as you already know how to prepare the best budget for yourself.
- Psychologically you tend to perform better when you write down your goals and hence it’ll keep you motivated and build up your confidence.
Shh…don’t talk money:
Most young people make this terrible mistake of not discussing about money related aspects, especially when it comes to their financial problems. This mind-set has been carried on since ages whereby talking openly about your financial problems was considered shameful and hence became a societal taboo; we are more attuned to always show an image that our lives are perfect and if someone openly starts discussion about increasing their finances, that person is called a show-off or an irritant.
Your financial health just like anything in your life needs attention…it cannot and should not be ignored. Being young is the perfect time to seek out and clear all financial doubts that come along your way; don’t be insecure, approach a mentor or a guide to help you scale your finances exponentially. Talk about money to grow money.
Refusing to start early-on with investments:
The power of compounding or the power of multiples will work its magic when investments are made early on. It helps your initial small amount investment to later grow into a massive sum thereby reaping huge benefits for you. Most people although aware don’t really attempt at framing their investment portfolio when they start to earn…it may be because they either think it’s too complicated or because it’s something new and therefore scary or simply because they’re too used to experiencing instant gratification or because they’re lazy and hence procrastinate investment decisions.
Money being an essential tool in this world as a means of basic survival, its only wise to build up that financial discipline and fatten that corpus amount at the earliest, so start investing from the day you receive your first cheque but plan your path before that.
Mixing emotions with money:
Money and emotions play a very important role in our lives and it’s essential that a proper balance between the two is maintained. If you let your emotions hijack your finances before taking any decision, then the possibilities of you diving into a financial mess is high. In today’s world of instant gratification and consumerism, it’s become difficult to look at the larger picture. Ever been in a situation whereby you purchased a product say an expensive dress impulsively and then regretted your decision the very next minute or when you had planned for a budgeted vacation but ultimately exceeded it? This happens to the best of us; we give in to our desires, the wishes of our loved ones even if that means digging a deeper hole in our financial pockets.
So tread carefully and maintain a balance between the two.
Being best friends with credit cards:
A credit card may seem like your best friend when you go on a shopping spree or when you want to save yourself from the embarrassment of not having sufficient cash to pay for your share of dinner with your friends by coming to your rescue or simply because at the time when the cash option backstabs you, credit card is there every time to support you when you want to fulfil your desires…but beware, a credit card is your best friend only till you fulfil your commitment of making due payments. Once you fail to return the borrowed money, it charges you with different fees; it brings down your credit score and what not!
Credit cards are a great substitute to cash…like I mentioned they are substitutes and should be used well within one’s means and capabilities of repaying the due amount (without much harm to one’s financial health).
Living on the edge from pay cheque to pay cheque:
When you are young, you have a lot of options to choose from without much hesitation. It’s very important that you are mindful while choosing an option. You have the option of building your investment portfolio and making investments from your paycheque, building your emergency fund with sufficient amount and you also have the option of living in the moment and spending all that you’ve earned. Both options have its own consequences: while investments grow your corpus and secures your future if done smartly, overspending always puts you at a risk as you’re heavily dependent on monthly paycheques to meet out your daily expenses, clear those debts etc.
The choice is yours.
Little drops of water make up a mighty ocean:
This proverb is essentially true in handling your finances. You small expenses daily can add up to a huge amount a year. For eg: Your daily trip to the snacks bar to get a break from work or your weekly trip to your favourite restaurant can actually add up to a huge sum a year numbering in thousands.
A small modification in this kind of spending can help you put aside more for money for savings, retirement or paying down your debt.
Mismanagement of debt:
A mounting debt is often scary to most people…it’s an obligation on their part to make payments for the amount due. In such instances, people often tend to fall deeper in the debt pit in an attempt to get out of it; eg: you take on a loan (which is another form of debt) in order to settle your previous debt. Therefore, proper management and handling of debt is required.
One way of doing it is the ‘Untangle the tangle’ approach- jot down all your debts on a piece of paper and categorize them into good or bad debts; a good debt is such which carries a low rate of interest or which is an investment for the future; a bad debt is one which wouldn’t offer returns in the long run or that which carries a high rate of interest. After which based on the ‘urgency’ or the ‘importance’ of clearing off a debt, you can focus on settling that first.
Falling behind your tax paying commitment:
The month of March is always a mad-rush experience! Most people lose their health as they find it stressful and intimidating. It is the time to file your returns and fulfil your tax compliances. Managing money also involves managing tax compliances…it is always better if you plan it ahead, utilize all legal options to save your money, and also file returns on time and make tax payment at the earliest to avoid loss of money, time and health.
Not having a comprehensive financial plan:
Financial planning just like any other subject needs to be treated comprehensively. A lot of people focus narrowly by either focussing short-term or long-term only. By comprehensive I mean, planning for your retirement the day you start earning, having you will written down once you own something, leveraging compounding to get better returns, framing your budget, managing your debt and many others.
Adapting a holistic approach will ensure better financial status, better health and better enjoyment of life.
In conclusion, YOUR FINANCIAL HEALTH IS IN YOUR OWN HANDS. If you practise financial discipline, frame budgets regularly, plan holistically, make mindful financial decisions, you’ll be financially fit even when you turn 100 years old but if you give in to overspending, procrastinate payment of debts, don’t leverage time and money and become negligent to money subject, you’re more at risk of encountering diseases that’ll drain your wealth while you’re young itself.