By Sanjiv Singhal | Jun 20, 2016, 07.00 AM IST | Economic Times
Interact with a lot of young earners on a daily basis. These are men and women in the first 5-6 years of their working lives, with dreams and hopes that require money to achieve. Some of them are already saving, while others are not, but all are full of questions and want to know how to do it better. It doesn’t matter what job they have and how much they earn; there are mistakes that run through all their stories. Here are some of the most common ones:
“I bought a life insurance policy to save tax.”
The good thing about this confession is that the person understands he made a mistake. For most, it starts at the end of the year when they needed to submit their investment proof to the HR. They scramble around to figure out how and blindly buy an insurance policy (after all, insurance is a good thing to have, no?). Almost every other tax-saving option is better than life insurance. Tax-saving (ELSS) funds are the best option for young earners.
“I wasn’t sure where to invest, so I didn’t.”
When you don’t set aside money regularly, it sits in your bank account and often gets spent. This hurts in two ways. One, it doesn’t create wealth for you, which investing early does. Second, it forms unsustainable spending habits. Start by setting aside 5-10% of your salary every month in a debt fund or in a recurring deposit if you don’t know enough about mutual funds.
“I bought stocks to double my money because my friend did.”
This is a mistake often made due to lack of understanding about how stock investment works and a false sense of knowledge. Greed and stories of exceptional returns also spur one on. The best way to resist this is to check with friends and colleagues about how many actually earned such fantastic returns and how many lost money. Stock investing requires deep knowledge and time. As a young professional, you are better off committing this time to your job.
“I change jobs every year to increase my salary.”
This is not an investing mistake, but one of not investing in yourself. Sticking with a job gives you the opportunity to develop your skills in a specific area. It also gives you the time to learn softer skills – of working with people and managing them. This leads to better career prospects and more wealth.
“I forgot about my education loan.”
A lot of young earners are starting their financial lives with an education loan taken for an MBA or MTech. As they mostly work away from home, they may not get the communication from the bank, or choose to ignore it. The interest mounts up and they are left with a bigger repayment amount. Focus on education loan repayment in a disciplined manner. When you are done with the with the repayment, direct this amount to long-term investments. Avoiding these common mistakes is easy once you know about them. Spending time learning about the principles of money and investing is a good investment to begin with.
(The author is Founder & Head, Product Strategy at Scripbox)