6 Personal Finance Lessons I Wish I Knew When I Started Earning

Things I learned the hard way that can help you become wiser in money matters

A few days ago, Paytm, an Indian e-commerce company, released an advertisement highlighting the gap in financial literacy between men and women.

In it, a group of 30 men and women of various ages and social backgrounds were asked to stand in a single line while the presenter asked questions. If their answer was “Yes,” the participants had to take a step forward. For every “No,” they had to take a step backward.

In the beginning, the questions were simple. For example, if they learned how to ride a bicycle before the age of 10, if they took music lessons in school, if they took lessons in sports, etc. A good mix of men and women were ahead and some were behind.

But as the questions started veering towards personal finance, the gap between men and women started widening. Questions like if they pay the household bills themselves, if they know the exact breakup of their salaries, the details of financial documents they are asked to sign, if they own a vehicle in their name, etc. saw more men stepping forward while the women kept stepping behind.

By the end, the front line consisted only of men, while all the women were left behind.

Since its release, this advertisement has been making waves all over social media. Some celebrities have strongly backed it, outlining the need for women to be financially independent, while others have taken it with a grain of salt. On a personal level, I thought this was an eye-opener.

If I were present among those 30 individuals taking the test, I’d probably be somewhere in between. I’m nowhere near as educated in personal finance as I’d like to be, but over the past few months, I’ve taken some conscious steps to educate myself and make my money work for me.

In this post, I discuss the six biggest lessons in personal finance I wish I’d known when I started earning. No matter what stage in your career you’re at, these lessons are relevant and will help you become more financially secure.

1. Saving is essential — even for the first two years.

When I first started earning, I felt this incredible power — that I no longer need to ask anyone before buying that pretty dress or those set of books I’d been eyeing since I was a teenager. In my mind, I knew saving was essential, but I thought the first two years would fly by in the blink of an eye and I can start saving later.

Now that I look back, it was all a huge mistake.

Irrespective of how much you earn, you need to pay yourself first. As Investopedia puts it, “The goal is to make sure that enough income is first saved or invested before monthly expenses or discretionary purchases are made.”

An average car or home-loan EMI lasts up to 15–20 years and can take up a major chunk of your salary.

2. You lose money if you keep it in the bank.

Most banks in India offer interest rates on savings account ranging from 2.5% to 6% per annum. However, the inflation rate in India for 2019 was 7.66%, climbing steadily higher with each passing year. If you keep your money in the bank during that time, it will actually decline in value.

These rates will be different in different countries, but the basic idea is valid no matter where you live. Just saving is not enough. You need to invest. You need to make your money work for you so it can grow.

Irrespective of how much you earn, you need to pay yourself first.

3. Avoid buying tangible assets.

Many of my friends succumbed to the temptation of buying a car or a house. The motivation behind this is the years of conditioning Indians grow up with. Tangible assets like vehicles or homes are “signs of wealth” and anyone who has them commands respect in society.

The sad truth behind getting a car or a house is that you’ll be neck-deep in loans before you even realize it. An average car or home-loan EMI lasts up to 15–20 years and can take up a major chunk of your salary. You’ll be bound to the bank and your job, with no end in sight until your loan is repaid.

If you absolutely need to buy a house, find a way to make it work for you. Sub-letting it or renting it out is a good way to earn back some of the money you invested. The same holds true for a car.

Just saving is not enough. You need to invest. You need to make your money work for you so it can grow.

4. Health insurance is a MUST.

When you’re young, it’s easy to assume that everything will be rosy forever and you’ll be fit. But the sad truth is that nothing in life is constant. Unless your company covers it, you need to buy health insurance.

By investing a small amount in health insurance each month, you’re protecting yourself and your loved ones from unforeseen emergencies in the future. Don’t procrastinate on this. Educate yourself as soon as possible and get your health insured.

Before investing anywhere risky, it’s important to build an emergency fund first.

5. Build an emergency fund first.

People who want to become financially aware think the only way to be a smart investor is by buying stocks. But here’s the truth no one else might tell you: before investing anywhere risky, it’s important to build an emergency fund first. Here’s how you can go about it:

• Track your expenses for three months and calculate your average monthly expense (AME). This is basically the average of your expenses for the three months.
• You can use an expense tracker app to keep track of your spending. I like using an Excel sheet.
• Open an account in a separate bank with a high interest rate for a savings account.
• Multiply your AME by twelve, and keep that amount in that bank. This will be your emergency fund. Don’t withdraw this amount under any situation unless it’s absolutely necessary.
• Every year (or quarter-yearly — depending on how frequently your bank compounds the interest), withdraw the accumulated interest and only keep an amount twelve times your AME in the bank.

This is a simple, solid way to assure yourself that you won’t be left high and dry in case of emergencies.

By investing a small amount in health insurance each month, you’re protecting yourself and your loved ones from unforeseen emergencies in the future.

6. Mutual funds are important.

The name “mutual fund” sounds terrifying, especially because of the oft-repeated saying popularized by hundreds of television advertisements — “Mutual fund investments are subject to market risks.”

Sure, they are, but the higher the risk, the higher is the possibility of the reward. There are several types of mutual funds available, and each of them has varying risks, rewards, and time horizons. Educate yourself first before blindly buying a plan, otherwise, it’s just gambling.

How you handle money in your twenties will have a big impact on your wealth as you grow older.

Final Words

I learned these lessons the hard way because the Indian education system pays little attention to making sure the students are financially aware. Also, this is a work in progress, and I’m sure there’s a long way to go before I can call myself an expert in personal finance.

Educate yourself first before blindly buying a plan, otherwise, it’s just gambling.

You might have noticed the absence of “stocks” from this list. That’s because I’m still reading up on them and it’s going to take me a while before I can confidently advise someone else.

Summing up, here are the six most important lessons in personal finance I believe every person should know right from the moment they start earning:

1. Saving is essential — no matter how much you earn.
2. You lose money if you keep it in the bank. Invest it and make it work for you instead.
3. Avoid buying tangible assets and binding yourself to repaying loans for the foreseeable future.
4. Health insurance is the simplest way to protect yourself from a worst-case scenario in the future. Don’t assume your health will be rosy always.
5. Build an emergency fund first before making any major investments.
6. Mutual funds are important. Educate yourself on the types, risks, and returns of each before buying anything.

How you handle money in your twenties will have a big impact on your wealth as you grow older. You don’t have to wait until you’re “rich” to become financially wise. Work on your financial health right from your first salary.

I create content in many different forms related to self-improvement, body positivity, and feminism on several other platforms. Join my email list to make sure you don’t miss out on anything new.