As soon as we start earning our salary, we make some radical financial and monetary decisions, which end up being mistakes in the long run. There are quite a few reasons for this, but one that is commonly attributed to problems like these is low financial literacy. Our schools, colleges, and a number of years of formal education may prepare us to face the real world, but more often than not, it leaves us completely clueless about the financial world. This is why we have listed down 5 common money mistakes we make in our 20s and 30s, so you can avoid these!
- Frivolous Spending- The indescribable joy of the first salary, the rush when your account shows salary credited, we understand how this can be an invitation to spend it all, and that’s exactly what we do in our 20s. Living beyond our means won’t get us to financial freedom anytime soon, and living paycheck to paycheck is certainly not the way to go. Since we are not taught the basics of money management from a young age, these skills take time to develop in our adulthood and may affect us in the long run, if we are not savvy with our expenses!
- Not Having Financial Goals- Like with any destination, it is easy to get lost amidst the confusion if our journey is not mapped. Having a financial goal is really important because if we don’t have a financial plan, our expenses will be unhinged and you will be completely clueless when an emergency hits. We know the future is a long shot, and you might feel that there is time, but every year you don’t categorize your goals, you lose a layer of financial security. Start with short-term goals, like saving an x amount, or opening up a retirement fund, just the thought is a wise investment in your future!
- Credit Cards- Oh the ominous credit card! When we are in our early 20s and 30s, maintaining an image (and over the top credit card limit!) is all the rage. This habit is extremely harmful especially in your 20s if you have education loans and other debts pending. Plastic is drastic, this rings true for that credit card lingering in your wallet waiting to add exponential debt with its towering interest rates and deceptive rewards. However, if you are of the very disciplined ones, you might think about owning 1 credit card.
- Not Having An Emergency Fund- Usually, having any money saved at all at the end of the month quickly translates to orders from Zomato and that red dress from Zara- although indulgences are good once, in a while, you are completely going bare if you don’t have an emergency fund. The pandemic has taught us bitterly that job security and financial wellness may all well be transient and that fortune favors the prepared. Not having an emergency fund will be crippling if any sort of financial or health emergency arises, you will be on shaky ground!
- My Friend Told Me To Invest In..- Beware of this! We understand that friendships are important, but take everything with a grain of salt. We have all been guilty of falling trap of conjecture and investing our money in a risky stock which we would not have otherwise. Falling trap to what others are saying is a common problem, but it can be extremely pricey when it involves literal money! Investing is a great tool for your money to work for you, but make sure that you do your own research and not fall into so-called trends and end up in grave financial danger!
Investors are just humans and every human is a different personality. And hence, our appetite to be able to see our money go up and down might vary as well. And what we want to do with our money is a very personal decision. So it is perfectly okay if you are an investor who hates to witness the volatility that equities bring on the table. This means, that you prefer certainty in life more than the worry about whether your negative return will turn positive ever again. Basically, you are a debt investor.
Saying no to equities is fine, as long as you know the trade-offs.
- Your returns will at best match inflation, debt instruments are unlikely to give you inflation-beating returns now and forever
- Hence, to accumulate the amount of corpus that you may need for financial independence may necessitate you to earn more as your invested money can only work to protect your capital (in the best case scenario)
- Debt Mutual Funds can also suffer losses in rare cases. This generally happens with funds which have high credit risk on their portfolio
But Debt Funds do come with advantages that are more in sync with your investment philosophy:
- Returns are fairly consistent (The degree of volatility is much lower than equity)
- Depending on the funds you select, you can have complete liquidity of capital. So you can withdraw whenever you want without any charges
- Debt FMPs or Fixed Maturity Products which have around 3-year lock-in, provide slightly higher returns than other debt funds which do not have a lock-in. Add to that the benefit of low or negligible taxation due to indexation benefits.
At this juncture, you might be quite disappointed with the fact that there could be losses in rare situations and you still don’t get to escape volatility. You must be telling yourself a 100 times that the good old FDs are still the best solution. But hold on. Is your Fixed Deposit making you wealthier? Read here to find out.
Debt funds are good investment vehicles to protect your capital and still earn more than your bank interest, but they may not sufficient to help you generate enough wealth to achieve financial independence.
Let us understand this by an example.
- A 30-year-old salaried employee has a current monthly income of INR 1.5 Lacs
- Annual Salary increment: 8%
- Annual Expenses: INR 1.15 lacs (Rent: 60K, Grocery: 20K, Child Education: 20K, Medical: 5K and Travel: 10K). The inflation rate for each is as follows: Grocery: 6% | Rental: 10% | Medical: 12% | Education: 10%
- The balance is saved in a combination of debt instruments which give the returns as follows: PPF: 7.6% | Bank Savings: 3.5% | Debt Funds: 7.0%
- The weighted average rate of return is around 6.7% annually
- Annual compounding of returns assumed
- Assumed no taxes on gains on investment
So let us see how your expenses increase for the next 30 years vis-à-vis your debt investments.
As you can see, your expenses will outlive your income from Year 22 onwards and that is when you will start dipping into your debt savings which will start declining thereon. And this happens while you are still working. You can well imagine what should happen once your recurring income drops or becomes negligible post your retirement.
We often ignore the impact of inflation on our lives and hence, the above is a very common “kahaani ghar ghar ki”. Therefore, even in the best case scenario, debt funds will perhaps help us match inflation but not create additional wealth that can make us live through our retirement comfortably. And this is the reason the majority of retired or nearly retired Indians are working out of compulsion. A lot of such people would have ideally wanted to spend their time reading or travelling or just basking under the sun on a chilly winter morning. But even after 40 years of working, they are striving to make ends meet just because our normal income flow cannot live up to the increase in expenses.
We, therefore, need to invest our savings in instruments which can considerably beat inflation. This is where equity comes into play. You may not like it but you may still have to consider it for a comfortable future. However, equity is a challenging subject for most and we tend to have an increased the fear of loss because of our own lack of understanding of which funds to invest in. Therefore, for a person who is new to equity investing, choosing the SIP mode of investing through a trusted advisor is the best route to choose.
But then why do people still invest in Debt? And where exactly should you be investing? Read here to find more.
Both Debt and Equity Mutual Funds are thriving in the Indian Financial Market. But which one should you as an investor choose between the two?
When are Debt Funds suitable?
- When you want to park some surplus cash for using it within 3 years
- For creating your Emergency Fund
- From an asset allocation perspective (when your risk appetite requires you to invest in low volatility instruments)
- You want to invest funds for a long period of time but the safety of capital is most important (Example: Funds of your retired parents who may need it any time)
- You have a lot of FDs on which you are paying significant taxes
When are Equity Funds suitable?
- When you want to create a fund for a goal which is more than 5 years away
- When you have surplus funds which you do not need to deploy in the next 5 years
- When your preference is to generate inflation-beating returns and you think you have the ability to survive the volatility
In short, every investor should have some debt and equity components as part of the overall portfolio. For a lot of people, the debt exposure is taken care of through PF, PPF, FDs, NSCs and other such low return instruments. But for those who are investing for the first time and do not have a certain percentage of their wealth in the debt instruments, they can look to start investing in both debt and equity funds.
How does CAGRfunds help?
At CAGRfunds, we seek to make investing simple for you. So we do not clutter your mind with complicated technical financial terms. We just ask you your objectives of investments and suggest the suitable solutions to you. We believe in developing long-term relationships with our investors and hence our focus is solely on helping you meet your financial goals. For more information, feel free to contact us on +91 97693 56440 or drop us an email on firstname.lastname@example.org