The financial decisions you make when you are young may either pave the way for your future financial success or make it more difficult to achieve your dreams.
Being young gives you the advantage of time and having a clean slate. If you make financially smart choices from the start, you can set yourself on the path to success and avoid missteps that may cause long-term damage. Here are some mistakes I often see young adults make and tips on how to avoid them.
1. Excessive and uncontrolled spending
These days, when anything you could ever desire is accessible with the touch of a screen or click of a button, spending money is very easy. Studies show that friends and social media especially have a huge impact on our spending, often influencing us to spend compulsively on things we don’t need.
Ask yourself if the items you keep paying for month after month and year after year – such as streaming platforms, music services, food delivery apps and other subscription services – are necessary. They may be tempting in the moment, but they can cost you in the long run. After all, every dollar adds up.
The solution to overspending? Create a budget and stick to it. There are many printable worksheets, websites, apps and other online tools available to help you do this. It’s important to take the time to look at your income and what’s left of it after you’ve covered essential costs, such as rent, utilities, transportation and grocery bills, and minimize discretionary expenses, or things you don’t truly need. Once you have your budget, make sure you’re continuously tracking your spending and holding yourself accountable. Budgeting not only makes you more aware of where your money is going and how much you’re spending but also helps ensure you’ll have enough to cover the necessities.
2. Not having an emergency fund
Young adults are often unaware of the need for an emergency fund and don’t consider saving for one. Among the many lessons 2020 taught us, one is how quickly things can spin out of control. At any time, the unexpected could happen, such as a broken laptop, car troubles, and unforeseen medical expenses.
As you prepare your budget, consider setting aside money for an emergency fund. Even a few dollars a month can make a difference. Read this article to learn more about emergency funds and how you can start yours.
3. Letting credit card debt pile up
Credit cards come with great responsibility. When used appropriately, it can be a tool to build a credit report and help you obtain loans in the future. When used irresponsibly, it can harm your credit, cost you money on interest you could have otherwise avoided, create problems for obtaining future credit, and more. The biggest mistake young adults make with credit is letting debt accumulate. When debt is not managed, it becomes harder to reach other financial goals.
One important signifier that you’re accumulating too much debt is not being able to pay your balance in full at the end of the month. Don’t think of credit as something you will deal with later. Focus on using credit only to buy what you can afford and living within your means. Budgeting and planning will once again be essential in helping you make responsible choices that will help you establish good credit.
Learn more about managing credit by reading these articles: What is a Good Credit Score and The Difference Between Having No Credit Score and Having a Bad Credit Score.
4. Not building any credit
On the other end of the spectrum, many young adults wait too long to establish credit. Not having a credit history can set you back in the future by making it hard to borrow. You may have trouble qualifying for personal loans or renting an apartment even if you have a strong, steady income.
This is why it’s important to learn how to use credit responsively rather than avoid it entirely. You can get started by opening a credit builder credit card or another type of introductory card and using it for few things, such as gas or groceries. You’ll have to make sure to pay every bill on time to establish a healthy credit score and to get in the habit of paying off your credit card on time each month. Read this article to learn more.
5. Misusing student loan money
College students can set themselves up for financial struggle when they don’t appropriately manage their student loans. Students often make mistakes such as only making minimum payments, not applying for student loan forgiveness, and taking out more loans than they can afford.
Students should only borrow what they need and have a plan of study. In the past, I’ve also seen students struggle financially due to last-minute career changes and prolonging their time in college. Being sure about the career you want and having a plan for how long you’ll be studying and how much you’ll need to borrow is essential for financial success.
Learn more helpful tips on how to manage your student loans by reading the following article: Strategies For Paying Off Student Loans.
6. Not investing
Once again, being young gives you the advantage of time and the luxury of taking certain risks. Investing is one of them. One of the most common mistakes young people make is not investing their money early because they think it’s not something they’ll have to worry about until later in life. Many young adults also don’t see the need to save and invest money because they have fewer expenses and would rather spend that money elsewhere. However, young people have a huge advantage to saving and investing earl because their money has time to grow.
There are many ways to invest. One of the most popular ways individuals start investing is through employer-sponsored retirement plans, such as 401(k)s. However, you may begin investing before your first full-time job by opening a Roth IRA, brokerage account or other investment account. Remember, starting early with a small amount is better than not starting at all until later in life.
7. Not saving for retirement
Young adults often put off saving for retirement because they think of it as something that’s very far away. But don’t wait! You’ll be grateful down the road if you start early. The advantage of investing for retirement when you’re young is that your money has much time to grow and compound.
You can start early with baby steps by setting aside a little bit each month. As your income increases, your retirement savings should increase with it. A Roth IRA, or individual retirement account, is a great way for young people to get started. Learn more about the many benefits of this tax-advantaged account by reading this article: Investing In An IRA: When, Why And How Much.
8. Rushing into new car payments
While buying a new car can be exciting, it is also a significant investment. Not only will you have to find the right car, you also have to evaluate how you’ll pay for it. Common mistakes I often see young adults make is rushing into new car payments or purchasing a car they can’t afford, which ends up hurting them in the long run.
It is often said that the total value of your vehicles should never be more than half of your annual salary. Additionally, first-time buyers should be cautious of payment plans that come with longer financing terms, low monthly payments, or zero-down payment offers. While they may seem more attractive and convenient in the moment, they can be deceiving, hiding the true costs of a car and creating a bigger expense in the long run.
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