Last Updated on January 4, 2021 at 11:53 am
In this article, Ranjan discusses four money mistakes that young earners should avoid as they start their careers and money management journey.
Four years after I got my first salary, I made my first investment; it was under Mr Vidya Sagar Arora( my uncle), who taught me the importance of investment. Till that time, most of the money I saved went into parties, mobiles, travel etc. Whatever little I had held in these years, went to PF and PPF. My father had retired from the government post and was getting his pension.
It never occurred to me that we as private firm employees do not have any pension and the amount of PF that I would accumulate by the time I retire, would not be enough to support my monthly expenses for long. I also realised how much growth I had missed by not investing in these four years. Ten years later, I still see young earners making similar mistakes. This observation led me to write this article – common mistakes young learners make.
1. No long-term view
As soon as we get our job, the initial to-buy list includes expensive smartphones, wireless headphones, dream bike and many other costly gadgets. Right from the first salary, we start saving heavily to buy these desires. Thought of retirement is way too far for most of us. A balance between spending and investing is necessary.
We all will retire one day and need to rely on our savings; considering inflation, a huge nest egg is necessary to meet expenses. See for example: What is the value of one crore in 2021? My suggestion to young earners is, save at least 10% of their income and invest in assets. As Robert Kiyosaki says “Assets put money into your pocket, liabilities take money out of your pocket. “. Minimum 10% amount should go in buying assets, the amount might seem small to start, but over 35 years, this would be more than your expectations.
For example, 2000 rupees invested for 35 years every month at about 10% CAGR, would accumulate to Rs.68,51,719; however, the same amount invested for 31 years would accumulate Rs 45,99,686 – the growth is exponential. Most of Warren Buffett’s wealth was created after he turned 60. I am not saying to wait till 60 before you make significant expenses; all I am suggesting is, small amounts, invested early.
As your salary increases, the amount of investment should also increase, following a per cent allocation; 10% is just starting number; for someone who can save more, wealth creation would be faster, but I would suggest at least 10% is a must. One could allocate 20 to 30% of the income to the wants/desires. In a few months, you would accumulate enough for the expensive items you wish to buy.
2. Not creating a category of expense and assigning monthly limits
I see a lot of young earners maxing out their credit cards. Instead, I suggest them to have amount limits to each category of expenses. Example, keep a limit of 10% on shopping. The moment you cross that, you are in the red zone. Again what percentage should be the limit, is purely one’s choice. But there should be a percentage assigned.
Examples of some categories are groceries, eating out, shopping, investments etc. With people working from home, the number of online subscriptions per person has increased; when asked if all of the subscribed apps are being visited, the answer is a simple NO. Buckets and limits would have helped in this case as well. Keeping an expenditure cap on cigarettes and liquor could also be helpful in both health and finances.
3. Taxes
As salary increases, so do our taxes. At the same time, the government provides several ways to reduce tax liability. Most young earners either don’t avail of those or get too careless to let the benefits go. Below are some of the common examples :
A. Not taking benefits of food coupons, telephone reimbursements, LTA etc. Most companies offer food coupons; the amount taken in the meal cards is free from taxes. Usually, these are within the range of 2000. I often hear people say “It’s such a small amount “. There is a famous saying,” A penny saved is a penny earned”, and when it grows over long periods it counts big.
B. Not declaring previous employee salary to the new employer. I have seen this several times. Whenever people switch from one company to another within the financial year, they do not declare previous companies’ salary. The effects are not showing until taxes are filed. At the time of filing, both incomes are shown in ITR, and now it comes as a surprise. 25000 plus amount comes as a surprise tax.
C. Investing at the time of submission. I commonly see people rushing to the banks, brokers in December; Reason, companies ask for tax proof, and then people make their investment in one go. What they do not realise is, the time lost. Let’s take an example, if one deposit 50000 in PPF account in April (starting of the financial year), by the end of the year he would have got say 7% interest for a little over 11 months during which time it would have appreciated.
On the other hand, the person investing in December would give only a few months for the money to grow at the same rate, while cash in the bank account would only fetch 2-3% in a savings account. If you don’t have enough money to invest in April, you can invest every month as salary comes. Similarly, for equity investors, SIP would work.
D. Saving only to save taxes: The moment investment reaches the minimum amount to bring tax liability to zero; people stop investing then and there. Instead, my suggestion is to have Goals like retirement, marriage etc.; and fund allocation accordingly. It is best to sit with a financial advisor to have goals defined and a proper asset allocation. The financial advisor does this job day in and out and would save you a lot of time. This does not mean you should not learn and leave everything to the advisor, but it’s an excellent way to get a head start and have guidance all along.
E. Not keeping proofs for tax filing: Instances of this and decreasing as we’re going digital, typical example are people declaring LTA, but not keeping the air travel boarding passes. At the time of filing, they are unable to avail tax benefits.
4. Equity Investing Mistakes
A. Opting Equity for Short Term Goals: I was responsible for guiding a close colleague to equity investment for higher studies which were just a year away. I still regret that. Equity investment should be avoided for short term goals, especially if goals are non-negotiable. We should only use equity for goals more than five years away and that too not 100%. It would be best to consult a financial advisor and invest with the right asset allocation.
B. Not taking ESOPs Several companies offer ESOPs at discounts, most of the employees do not accept them. When I joined my first company, we had a 15% discount; to add we had an option of refusing at the time of allocation if company shares were down. I still recall the company’s share was nearly $35 at that time, which now treats close to $250. I still regret not using that option.
If the next generation makes the same mistakes which the previous generation has already made, I think it’s the worst of the crimes. I hope young earners manage their money better than I/we did. I wish all readers, a Happy Learning and Happy Investing.