7 money mistakes the young must avoid

Investment advisor Sheetal Jhaveri busts popular money myths to make you a confident investor.
Illustration: Dominic Xavier/Rediff.com

When you are investing, you are buying a day that you don’t have to work: Aya Laraya, Philippines-based investment advisor, speaker and TV host.

Future goals can only be achieved if you act today.

To ensure you are financially independent in the future, you need to start early. When you are young, responsibilities are fewer and the risk-taking appetite is big.

While today's generation is very well informed, everyone wants to be rich quickly, especially those investors who lack patience. This haste more often than not leads to rash decisions, mistakes and losses which can scare the young investor for life.

Losing money pinches everyone, poor or rich, and if one has incurred huge financial losses at an early stage in one's financial investment journey, one may go on the back foot at a time when they should be playing on the front foot.

Listed here are some financial mistakes people make and the corrective measures that can help confident investors.

1. Investing and saving is for elders

Unfortunately, most of our elders were not financially literate when they were young and didn’t know about various investment options.

But our generation has been blessed with this knowledge and we should aim to use it to the fullest.

In fact we should use this knowledge not only to maximise our investments and savings, but also that of our elders, by teaching them about the latest financial options available today.

Just imagine what we could achieve with the modern financial tools of creating wealth at our disposal when our parents, who had limited resources and knowledge, could give us such a secure and stable future.

My youngest client is an 18-year-old college-going boy who is trying to save Rs 500 from his pocket money every month and has started a Systematic Investment Plan.

As he is young, he has selected an equity fund.

If he saves till the age of 30 and stops investing after that, the power of compounding will help his investment grow and yield a sizeable chunk in the future.

If he continues investing Rs 500 every month till the age of 30, his investment will grow to Rs 159,531 (based on his investing Rs 500 for 44 months, which is a total of Rs 72,000, in an equity mutual fund and assuming a return of 12 per cent).

Now, assuming he keeps this amount invested till the age of 60 without adding a rupee, his investment will yield Rs 47,79,530 (at the rate of 12 per cent per annum).

If he starts at the age of 30 years and invests Rs 500 every month till he is 60 years, his investment will become Rs 17,47,482 (his total investment, in this case, is -- Rs 500 for 360 months -- Rs 1,80,000; again assuming that his return is 12 per cent).

The magic of power of compounding is amazing.

Keep aside a small portion each month from your salary or even your pocket money and start investing; you will thank yourself later.

2. Leverage or debt

Since you are just starting your career, you may be inclined to take loans to purchase a house, car or personal loans for gadgets or travelling to foreign destinations.

But when you decide to borrow, check your total annual debt payment -- your EMIs -- first and then think of borrowing.

If this ratio is more than 45 per cent, that is if are paying more than 45 per cent from your total take home pay towards loans, then that is a dangerous situation. It can spiral into a cyclic debt trap.

Also, keep in mind this simple rule: Never Borrow To Invest.

Investments should be from your savings and not with borrowed money. If you opt for the latter and if, by chance, your investment fails, you not only have to bear that loss but are faced with the double-whammy of paying interest on the amount you have borrowed.

3. Investing with half-knowledge

It is useful to keep this unwritten rule from Peter Lynch, an American investor, mutual fund manager, philanthropist and author in mind: If you don’t understand it, then don’t put your life savings into it.

Simply put, Lynch asks people to stay away from complex or fancy investment products because they are not always the right product.

If you don’t understand a business or an investment product, either avoid it or try to learn more about that product and/or business; once you have sound knowledge of the subject, then you can go ahead and invest in it.

4. Spend today, save later

This seems to be the mantra of the youth today.

Recent studies have shown that the savings ratio, which was 37.819 per cent in 2008, has declined to 30.512 per cent by 2018.

Lifestyle inflation -- the increase in one’s expenditure, with the increase in income -- is on an upswing, even as people are improving their awareness about the importance of financial planning.

For those born on the cusp of the 21st century, the goals have shifted from savings for further education or retirement to buying the latest smartphones or gadgets.

There is no harm in doing so long as you are earning and saving, and funding these impulse purchases with your own money and not dipping in your parents’ or your own savings.

Also, before spending, keep certain percentage aside for saving.

Young investors should realise that today is the time when their responsibilities are at the minimum. As years go by and your income increases, so do your responsibilities.

At a later age, when you have with more responsibilities, you may not have enough left at the end of the month to even meet your expenses, let alone investing.

So start early, and spare yourself the added pressure in your later life.

5. Over-hedging

Although it is widely said that youth is the age to take risks, beware of over-hedging.

In other words, don’t put huge amounts into an investment in hopes of huge returns.

Before you invest, always fix a margin for loss and profit.

Do not invest on advice of the so called ‘well-wisher’ or those who promise extraordinary returns.

Take an expert’s opinion before investing; limit your investment to an amount that will not cause you to lose sleep over it.

6. Not taking risk at all

Again, a strict no!

A young client, who recently approached me for financial planning advice, wanted to put her money in fixed deposits only.

For short-term money requirements, one can invest in fixed deposits. But for long-term goals, especially since you have age on your side, you can take calculated risks.

Do, however, ensure you have researched adequately before you invest.

7. I am too young for insurance

Besides investments, other areas where the young falter is insurance.

One is never too young for insurance.

Once you start earning and contributing towards the house and other expenses, insurance is a must to ensure that, in case something happens to you, your family is taken care of financially.

Also, most youngsters tend to not take medical insurance as they are generally covered by their employers. But what if you leave your job or decide to start your own business? The medical insurance provided by your company expires.

So, in addition to your company insurance, buy an additional medical insurance on your own.

Youth is the best time to buy insurance, as the premiums you pay for your life insurance and Mediclaim are very low.

Lastly, learn about different investment avenues and try to align them with your goals. This will help you spread your investments across different classes of assets with varying returns. 

Sheetal Jhaveri, MBA (finance) and a certfied financial planner, is the founder of Dhanplanner, an investment advisory firm. She can be reached at sheetaljhaveri@dhanplanners.com.