Top 5 Financial mistakes to avoid

As a graduate stepping into the independent financial world, it all seems rosy. A steady income, a flashy bank account with a debit card, the possibilities seem endless. Only for it to all go south… fast. Financial independence vaporizes into a cloud of credit card debt. Personal loans seem a stop gap solution, but they themselves are bigger menaces.

Having been through this hell and needing a helping hand from my father, I’ve learnt it the hard way. Here are the top financial mistakes everyone does in their 20s…. and maybe in their 30s too if they are not too careful.

living paycheck to paycheck

A graduate’s salary is never enough. Especially looking at the scrap book of stuff you’ve been wanting to buy ever since you got offered the job. Put it all off. The Xbox One can wait. Those Jordans you wanted for Christmas can wait. Nothing is more foolish than living from one paycheck to the next. The sight of the account balance in the salary account dwindling down to zero, and even overdrawing the account is scary. On top of not having the necessary means to sustain living till the next paycheck comes in, no one can afford overdraw fees as well.

Not having a rainy day account

Life is unpredictable. A well paying job can become redundant the next day. A hostile takeover of the company can come with a chunk of the workforce being laid off. A rainy day account is an account you maintain on the side for this eventuality. Accumulation of money in this account should be autonomous. Performing this as a manual task will only lead to optional avenues of spending this money elsewhere.

To start with, the contributions into this account can be meager. $1 a day, set up a a standing instruction can be sufficient enough. This will also give you the hope that there is a slice of the paycheck going in as savings. Up the contributions to $5 a day after six months. You’ll have a sizable savings in no time.

Not understanding Credit Cards

Credit cards are vastly misunderstood. They should not be viewed as an automated money lending machine. Money you don’t have, is money which should not be spent. Credit cards offer an easy way to increase your purchasing power. But they should be viewed as vehicles which only increase your purchasing power till the next statement arrives.

On the flip side, credit cards should also not be viewed as the bane of all existence; as the boy who your mom asked you to stay away from. They are in fact necessary to improve your credit score. A graduate on his first job, has no credit history, no credit worthiness. Credit cards are the easiest ways of improving one’s credit score.

HOWEVER, the interest rates on credit cards are extremely high. 20% and above on several cards. Carrying a balance to the next statement period is detrimental, and is the easiest slippery slope to credit card debt. Credit cards should be used because they provide several other benefits like purchase insurance, cashback, airline miles etc. They should be used for all everyday expenses like groceries, bills, and travel. Do not spend beyond your means, and pay off the credit card statement in full. In doing so, airline miles accumulate, cashback is cashed back, and credit worthiness improves. And hey, no credit card debt.

An enthusiast can also pursue points chasing. Accumulate enough points over the course of years with everyday purchases, sign up bonuses etc., can provide free air tickets to travel the world. Credit cards also provide partnerships with hotel chains which grant higher statuses, discounts, free nights etc.

Buying a car too soon

A car may seem as a worthwhile investment, but in the age of Uber and other ride share services may not be the right option. A car makes sense only for a family / couple travelling to the same destination every weekday. Studies show that ride sharing works out cheaper for most travellers. A vehicle is a depreciating asset and loses it’s value the moment it’s taken off the lot. A second / third hand car may make financial sense, but we often end up digging into the rainy day fund to settle the full payment for the car.

Not investing

Another crime every mid 20s person does is not investigating avenues of investing. Mutual funds, ETFs, individual shares, or a high interest bank account. Our school system teaches us compound interest, but does not tell us what it exactly means. Earning yearly interest from deposits, or dividends from stocks and reinvesting this amount back into the savings medium can reap exponential growth over the years, Just give it time to grow, and make your money work for you.