For most people, the 20s is the decade where they start earning their own money and become financially independent. This is also the decade where most people end up making terrible financial mistakes.
This is the time, when most people learn the basic financial lesson the hard way and try to seek advice from friends, family or online ‘experts’ to rectify these mistakes.
But the thing about finances is that it is deeply personal and most financial advice floating out there are ways to extract profit from you. Even well-meaning ones can sometimes be completely wide off the mark due to a lack of proper knowledge and expertise.
The trick is to identify the ones that are good from the ones that do not apply to you. Here are some of the most commonly given reliable financial advice and some of the worst ones.
5 best financial advice
1. Creating a budget and sticking to it
This is one of the best but often ignored financial pieces of advice. Budgeting is the single most reliable way to know where your money is going. Not only does it help you keep track of your money but also plan your future expenses and know your spending habits. It also helps you to prioritize your expenses and even keep you out of petty debts.
You should ideally have a monthly budget, a quarterly, and a yearly one. But if that seems too intimidating then you should start with a monthly budget. It will help you live within your means and meet your financial goals without considerable financial strain.
2. Cash in on the benefit of compounding
One of the best ways to plan your finances and build your wealth is to start investing early and take the benefit of compounding. Compounding works best for long-term investment where the goal is to build wealth instead of making a quick profit.
Starting your investments as early as possible, even when the amount is small, will over time give you similar results as starting your investment late with a higher amount.
3. Emergency fund, health insurance & retirement plan
Financial planning is important to prepare yourself for any financial emergencies that may occur in the future. This includes health emergencies, any unplanned financial crises, unemployment, and retirement.
You should get started on an emergency fund (3 – 6 months of your salary) if you haven’t already. You should also have robust health insurance and a retirement fund started as soon as possible. If you already have them, then you have to keep on strengthening them as per your requirement.
4. Educate yourself financially
When it comes to financing, many people will try to be financial advisors and financial planners. But, it will be your responsibility to take the right financial decision for yourself. Therefore, having financial knowledge and educating yourself about personal finance will help you make better decisions and plan your finances better.
Start your financial education with our curated YouTube series about all things finance.
5. Learn about your taxes
An unavoidable part of adulthood is that you will have to do your taxes for the rest of your life. As your earnings increase your taxes will also increase. Knowing the legal ways to save taxes will help you retain a good amount of your salary over a period of time.
5 worst financial advice
1. Buying a house or car when you are not ready
For a lot of people, a car or a house is a financial goal and sometimes even a marker of financial stability. However, any big purchase like a house or a car where you need to take a loan to be able to afford it requires considerable thought and financial analysis.
For a house, the loan amount is very high so you need to prepare yourself for the substantial EMIs that you will have to pay for a long period of time. This will affect all your other financial decisions significantly, therefore getting into this when you are not ready can be disastrous.
2. Having a ‘Zindagi Na Milegi Dobara’ approach to life
The ‘YOLO’, Zindagi Na Milegi Dobara, and even the recent viral reel of “I’ll earn my money back but I’ll only be 23 and doing xyz once” are all ways to create FOMO and push you to spend more on unnecessary and luxurious experiences that can significantly hamper your financial stability.
Spending your money frivolously without planning can land you into serious financial debt. It is okay to have enjoyable things and experiences but to make a habit of doing it impulsively without planning is bad for your long-term finances.
3. Focusing on savings instead of investing
Saving from a young age creates the habit of living within your means and following a budget. But, as an adult focusing on savings instead of investing can be harmful to you. A diverse portfolio of investments will help you beat the rising inflation rate and build wealth over a period of time.
This is the best way to put your money to work and increase in value by not putting much effort.
4. Small debts from friends, family, or banks are okay
Any debt even when they are informal should be avoided. This is because taking informal debts now and then creates a habit of living above your means and not following a budget. Small and regular informal debts also have the potential to ruin relationships and create distrust within family and friends.
If you are needing small debts regularly, it also suggests that there is something fundamentally wrong with your financial planning and you should put more effort into planning your finances better.
5. Once your retirement plan is set, you don’t need to look at it
Setting up your retirement plan, health insurance, and emergency fund is only the beginning. You have to keep on updating it and strengthening it to make it better. If your income increases so should all your mandatory funds. This is to ensure that in case of any financial crisis, you will keep on enjoying your existing lifestyle and do not need to significantly downgrade your lifestyle in order to meet your needs.
No matter how good and stable a piece of advice sounds, when it comes to finances, you have to educate yourself and take responsible financial decisions on your own. Getting good with finances will require you to put in consistent effort in learning about finances rather than seeking advice from people.
Read more: Zen And The Art Of Investing
Watch/hear on YouTube: A janitor who became a millionaire?
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