5 Financial blunders to avoid in your 20s.

Your 20s are a period of exploration and growth, but they also represent a critical time for establishing a solid financial foundation. This decade is essential for making informed decisions regarding both your career and financial future. Unfortunately, many individuals fall into financial pitfalls that result in long-term debt, often extending into retirement. During my internship at Nuvama Wealth, while interacting with various clients, a common theme emerged: the importance of early investing and diversification. By avoiding these five common financial blunders, you can ensure a prosperous future.

1. Neglecting Term and Health Insurance

Insurance might seem like an unnecessary expense when you're young, but it's essential for protecting your financial future. Uncertainties are like unexpected guests who you want to avoid but inevitably have to deal with. Health and life insurance must be prioritized for these uncertainties.

• Term Insurance: This provides financial security to your loved ones in case of your untimely demise. It’s especially important if you have dependents. Term insurance policies are affordable and provide a large cover for a relatively low premium.
• Health Insurance: Medical emergencies can strike anytime and lead to significant financial strain if you aren’t prepared. Health insurance covers hospitalization costs, medical treatments, and other healthcare expenses. Without it, you might have to dip into your savings or go into debt to cover unexpected medical bills.

2. Ignoring Mutual Fund SIPs

Investing early can significantly boost your wealth due to the power of compounding. A Systematic Investment Plan (SIP) in mutual funds allows you to invest a fixed amount regularly, helping inculcate financial discipline and build wealth over time. For those with no time to monitor the market daily, mutual fund SIPs are ideal, as they follow different investment categories based on one's risk appetite and preferences.

• Power of Compounding: The returns you earn on your investments are reinvested, generating their own returns. Over time, this compounding effect can lead to exponential growth of your investments.
• Rupee Cost Averaging: Investing a fixed amount regularly helps you buy more units when prices are low and fewer units when prices are high, averaging out the cost of your investments over time.

Example: Priya started a SIP with ?5,000 per month at age 22. After 10 years, assuming an average annual return of 12%, her investment would grow to approximately more than ?5 lakhs. Starting early gives Priya a substantial head start on her financial goals.

3. Buying Materialistic Goods (Asset Over Liability)

It’s easy to get tempted by the latest gadgets or luxury items, but these often depreciate in value. Instead, focus on acquiring assets that appreciate over time. It requires discipline and planning to accurately know what assets for you are and what are liabilities.

• Assets: Items like stocks, real estate, and mutual funds increase in value over time and contribute to your wealth.
• Liabilities: Items like cars, high-end electronics, and luxury goods typically decrease in value and do not contribute to your wealth.

Example: Instead of spending ?1 lakh on a high-end smartphone, consider investing that amount in a mutual fund SIP. Over 10 years, with an annual return of 12%, this could grow to around ?3.1 lakhs. This investment appreciates over time, unlike the smartphone, which loses value and becomes outdated within a year.

4. Not Renting Instead of Buying

Buying a home is a significant financial commitment that might not make sense early in your career. The early professional years, typically the first five years, are a period of exploration where you should explore different cities or jobs to find better opportunities and build a network.

Many argue that owning a home gives protection and relief, but they often overlook that Indian real estate is highly inflated, resulting in long-term EMI payments until retirement. Investing in mutual funds and equities can generate returns up to 12-15%.

For instance: An SIP of ?20,000 at 15% for 10 years can build a corpus of more than ?55 lakhs. In contrast, a home loan of ?50 lakhs for 30 years results in ?94 lakhs in interest payments with an EMI of ?40,000, totaling ?1.44 crore. This adds more financial burden early in your career.

• Flexibility: Renting offers more flexibility, allowing you to relocate for better job opportunities without the burden of selling a property.
• Cost Savings: Renting can be more economical, especially if you’re early in your career and don’t have significant savings for a down payment. It also frees up more money for investments that could offer higher returns.

5. No Emergency Fund

Life is unpredictable, and not having an emergency fund can lead to financial stress when unexpected expenses arise. In recent years, the world has faced many unpredictable events. To save yourself from uncertainties, have an emergency fund and invest it in less risky assets such as gold or silver, or assets that are easy to liquidate when requires as mutual funds and stock markets could be affected by uncertainty.

• Financial Cushion: An emergency fund acts as a buffer, covering unexpected expenses like job loss, medical emergency etc. This prevents you from going into debt or derailing your long-term financial plans.
• Savings Goal: Aim to save at least 3-6 months' worth of living expenses. Start small and gradually build up your fund.

Avoiding these common financial blunders can set you on a path to financial stability and success. Start early, stay informed, and make smart financial decisions to build a prosperous future.

Supporting Data Points:

• HSBC 2023 Survey: 40% of young adults in India struggle with financial stress due to unexpected medical bills.
• National Stock Exchange of India: Individuals who start investing in their 20s accumulate up to 60% more wealth than those who start in their 30s.
• National Sample Survey Office (NSSO): Only 20% of the Indian population has any form of health insurance coverage.
• CRISIL: SIPs in equity mutual funds have delivered annualized returns of around 12-15% over the past 10 years.
• Nielsen: Young Indians spend an average of 30% of their income on non-essential luxury goods.
• Reserve Bank of India: Only 30% of Indians have an emergency fund, and the average home loan borrower spends over 40% of their income on EMIs.