6 financial mistakes people in their 20s must strictly avoid
November 4, 2016
If you are in your 20s and complacent about your finances, you have a reason to be worried. By delaying investments and policies, people in their 20s lose out on many advantages including better premium rates and tax exemptions. But that's not all. The real impact occurs when people reach their 40s and lack of savings and proper investments leads to financial vulnerability as expenses rise. These are the six mistakes people should avoid:
Not getting a life insurance: First and foremost, get a life insurance. A life insurance policy pays family members in the event of the insured person's demise. Term insurance is the cheapest insurance cover. However, you can give it a pass if you do not have dependents. "Children and retirees, who don't have an income to protect, don't require life insurance," says Manik Nangia, Director & Head of Product Management, Max Life Insurance. To ensure that your family gets enough money to replace your income in case of your demise, opt for a high sum assured. Calculate the sum yourself based on your needs. Sit with pen and paper or open an excel sheet to do the calculations (see Calculating Human Life Value). Consider the rise in prices while calculating day-to-day expenses and goal amounts. It is better to buy a slightly bigger cover than remain underinsured.
Neglecting Health Insurance: Get a health insurance, it is very important. According to Aon Hewitt's Global Medical Trend Rates 2016, India's medical inflation is 12.5 per cent, much higher than the global average of 9.15 per cent. No debt investment will pay you more than this. So, once you have started paying your loans, you must buy protection from hefty medical bills. Health insurance will protect your finances in case of a medical emergency. Otherwise, hospital bills may eat up all your savings. says Jain of Bajaj Capital. Calculate how much sum insured is enough for you and your family based on your lifestyle, health and family medical history
Not opening a PPF account: Public Provident Fund, or PPF, gives triple tax benefits. First, you can claim deduction under Section 80C for contributions. Second, the interest income is tax-free. Third, the lump sum received at the end of the tenure is also tax-free. There is no other financial instrument, except the employee provident fund, or EPF, that gives all these benefits. It currently offers an interest rate of 8.7 per cent. The maximum investment is Rs 1.5 lakh in a year. By investing Rs 1.5 lakh every year, you can save Rs 46.75 lakh over a period of 15 years.
Not subscribing to a recurring deposit: Create a recurring deposit with your bank as that way you will end up saving every month. This will stop you from spending everything that you earn, and instead lead to steady savings. This could result in you managing your monthly budget better and stop you from spending more than you can afford. Even a small sum every month can add up to a decent amount after a period of one year.
Taking loans: Be careful while taking loans. Do not owe more than what you can pay. If you have an existing debt, pay it first. Get rid of loans on which the rate is the highest. Another reason to pay on time is that this affects your credit score. A low credit score can hit your eligibility for loans. If there is any amount outstanding against your name get rid of it immediately.
Not filing income tax returns: Many youngsters miss filing their income tax returns. This is not a good practice. You will not get a refund on your taxes if you have paid more taxes during the year than you are supposed. Moreover, not filing income income tax could lead to to a penalty.