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The world in recent times has changed drastically. Millennials are now well informed, self-supportive and are adaptive to best practices in the financial domain. However, this aggression drags them to potential threats which need to be identified and worked upon. Common pitfalls that generation Y should avoid are highlighted:
Ignoring the power of small savings Being in control of personal finance is very critical at this age. An individual in this age group normally spends more than 60% of the total income earned. These spends contribute largely to the expenses that are voluntary in nature. Define a budget and identify what dents your pocket the most. Determine the expenses that are not critical for you. A small saving diverted to investment each month can earn you fortune in future.
Rs. 5000 invested each month in SIP can earn you approximately Rs 1.6 crores in 25 years. Surely this amount is not too less!
Getting into debt trapA large number of youngsters who start their career have an inclination to loans credit cards. A small outstanding credit card bill rolls up every month and piles up a huge amount to be paid. Personal loans for buying gadgets add to the debt trap. This is followed by car loan, home loan, another personal loan, another credit card and the debt cycle continues.
It is good to hold credit cards provided you pay your credit cards bills in time and loans should be taken considering the facts that your EMIs should not be more than 40% of your total income.
Housing loan of 25 Rs lakh will add Rs 25000 to 30000 of EMI. This could be a major pie of an expense. Ensure that you have adequate surplus left after paying your EMIs.Do not know where to investMost individuals invest based on what their friend and relatives have recommended. They do have a clear understanding of what they have bought. The problem is that investing in products, which you don’t understand blocks your financial energy and your money is stuck.
So if you are buying a financial product, please learn how it works and how it’s going to benefit you at the end of the day. Find out everything about return, risk, liquidity and taxation. Plan your goals and identify the suitable products. Investing is not a rocket science if done with proper diligence and need identification. A combination of adequate insurance covers and SIP will help you create a balance of investment and protection.
Ensure that 25-30% of your income is invested every month.Risk only what you can looseKnow what is your appetite to tolerate risk and invest as per the defined diversified products. Being young does not warrant an eligibility to take a high risk. Strike a balance between risks and potential returns. The question is how much risk can you comfortably afford to take?
There is no definite answer to this question and it will depend on your personal circumstances, risk tolerance, family situation and your earnings. The best way to get started is to come up with a financial plan or investment strategy and work out exactly how much you are willing to invest and what your overall strategy is.
Emotions does not make you richOne of the biggest mistakes that young individuals make is getting emotional while possessing an asset as well as while disposing the same. Think objectively when it comes to buying a fancy gadgets and accumulating conspicuously. It is important to identify your requirements and spend for the rightful and necessary possession. What your friends buy may not necessarily be of an upmost importance to you.
When it comes to investment, remember that it is not a short term game. Today it has become so easy to buy and sell financial products online. Sometimes it is hard to see the value of your investment diminish or get tempted to sell off at minimal profits. So understanding of the investment horizon is important and one must review it regularly but avoid selling your investments over a shorter duration.
Bottom lineStay focused on your financial milestones. Young investors should take advantage of their age and their increased ability to take on risk. Applying investing fundamentals early can help lead to a bigger portfolio later in life.
Avoiding some of the common mistakes above will help young people learn investing early and embark on a fruitful investing career.
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