3 Money Mistakes Young Professionals Make

The experience of your first pay check is surely one to savour and remember fondly for your entire lifetime. However, young professionals tend to make a few all too common mistakes with their newly earned money. Here are 3 of the most common ones.

Excessive Speculation

First, they may become overtly speculative – hastily trading on stock tips, for instance. In our experience, reckless trading can only have one long term outcome (beginners luck aside); and it’s not usually a positive one. Embittered by such a poor initial experience, many young professionals turn away from the stock markets for good, ignoring all the much espoused benefits of staying put for the long term in quality stocks.

It’s a well-publicized fact that in the long run, stocks outperform every other asset class handsomely. It’s difficult to quantify in Rupee terms then, just how detrimental such an early experience can be in terms of opportunity costs. Young professionals are therefore ill-advised to fritter away their earnings by way of mere speculation, but are encouraged instead to invest selectively in a portfolio of stocks of blue chip companies in a systematic, staggered manner.

Excessive Risk Aversion

The second mistake lies in placing oneself at the opposite end of the risk tolerance spectrum. Many young professionals adopt an overcautious approach right off the bat; only committing their monies to PPF accounts or deposits, for instance. What’s more, this circumspect attitude towards investing is often adopted at the behest of well-meaning parents or grandparents! Unfortunately, this habit can severely impact the quantum of achievable wealth creation a decade down the line.

Remember this: the one good thing about money is that over the long run, it can produce more money by way of compounding! By becoming risk avoidant so early in their lives, young professionals rob their future selves of the prospect of putting together sizeable corpuses for their later years. Rs. 5,000 saved in a Mutual Fund SIP for 25 years can compound to Rs. 1 Crore – in a PPF account, it’ll never grow beyond Rs. 50 Lacs. For your long-term goals – Mutual Funds Sahi Hai!

Buying Life Insurance When it’s Not Needed

Third, young professionals without dependants may purchase life insurance, just to save taxes in the yearend rush to submit their documents to their HR Managers. Barring a few rare circumstances in which your aging parents are dependent on you from the day you earn your first pay check, this would constitute a foolish act.

A few low cost ULIP’s (which constitute a more aggressive investment) may make a tad more sense than traditional policies. But why should you pay for a life cover when you don’t require it?

In conclusion - here are the thumb rules to follow as a young professional: don’t speculate in stocks, derivatives, commodities and other “weapons of mass destruction”. Invest in long term growth stocks (preferably blue chip stocks) with a time horizon of five to ten years. Start an SIP in an aggressive fund and step it up by 10% annually – one of these SIP’s should be an in a tax saving mutual fund or ELSS (Equity Linked Savings Scheme) which will double up as a tax saving instrument. Avoid low risk, low return investments. And lastly, make sure that you critically evaluate the actual need for a life cover before you opt for one.