When you are young most people do not think about how much their financial actions now could impact them later in life. Four of the biggest financial mistakes young people make are:
Note Saving Enough
Taking on Large Amount of Consumer Debt (Credit Cards etc.)
Not Controlling Spending
Not Investing Earlier/Not Investing at All
Not Saving Enough:
Many young people in their late teens and 20s tend to spend most of the money they make leaving little left for savings. It is one thing if you are making so little money and can barely afford basic living expenses but someone living at home making $30,000 part time while going to school should have no problem socking money away. Another example of someone who should have no problem building up their savings is someone who is making $60,000 right out of college. There are many more examples that could be discussed but the main point is that many young people could save money if they want to do so.
So what types of expenses are draining young people’s bank accounts and ability to save?
Renting a high end fancy apartment. I am not saying live in the ghetto but when you rent a high end apartment that is triple the average rent in your area you are just blowing money.
Buying/leasing and expensive car. Many young people making a decent living often buy or lease cars that are way too expensive for them. You may be able to afford the monthly payment on that new Mercedes but how many years are you stretching the loan or lease out to get that payment low enough?
Eating out/going out excessively. Eating out every day is a sure fire way to drain your bank account. Also going out to the bars multiple times per week can also really put a dent in your wallet.
Buying the latest and greatest technology every year. For example buying the new IPhone every time a new version comes out.
Now I am not saying don’t spend money on anything but if you are consistently doing all of the things above you are probably living beyond your means and not saving any money. If you have no money saved it could impact your ability to cover expenses if an emergency pops up, keep you from having enough money to buy a house, cause you to have to go into expensive debt to fund necessary purchases and much more.
What can you do?
Rent an apartment that is in a reasonably priced complex. Maybe it doesn’t have all of the bells and whistles that the high end place has but the reality is you probably do not use many of those bells and whistles anyway.
Don’t buy or lease a new expensive car. Look for a reasonably priced new or used car that will make you happy and do the job. You do not need a $60,000 Mercedes even if you can “afford” the payments. If you have to have that fancy car maybe look for a car that is a few years older which will usually be half the price.
Cook more meals at home and eat out less. Eating out every day is way more expensive than buying food and cooking at home. Also when you go out to bars don’t spend excessively on drinks, buying 20 people a drink can add up quickly.
Do you really need the latest IPhone each year? Consider buying a new phone (or like items) every few years. This will save you a ton of money.
Taking on Large Amount of Consumer Debt (Credit Cards etc.)
Just because you have a credit card with a $15,000 limit does not mean that you should go out and spend all of it just because that is your limit unless you have the $15,000 to be able to pay it off and still be in a good financial position. Often people with credit cards overspend with money they do not have and this puts them into a debt they may never get out of since the interest rates on credit cards can be higher than 25% per year!
Using credit cards can be a great thing if done the correct way as they provide cash back rewards and many other benefits. If done the wrong way these benefits are nothing compared to the interest you will pay.
What can you do?
When you have a credit card always make sure you are paying off the statement balance each month in order to avoid interest charges. If you are not able to pay the statement balance pay as much as you can.
Do not go crazy just because you have a credit card, treat the card as if you are spending cash. If you do not have the cash to back it up do not spend! This will keep you from overspending on your card.
Not Controlling Spending:
If you are spending every dime you make or even spending more than you make you are in for trouble down the road as you will never be able to save money or you may even end up with expensive debt as described above.
An important concept to think about is cash flow. Cash flow is the net cash that you have left over after you take the cash you receive from income and subtract your expenses. You always want to make sure that you have a positive cash flow. If your cash flow is negative that means that you are most likely living beyond your means!
What you can do?
Create a budget. Know how much money you have coming in and how much money is going out at all times. This will allow you to know when you may be spending too much.
Cut out unnecessary expenses such as many of the items described in “Not Saving Enough” above.
Not Investing Earlier/Not Investing at All:
Investing when you are young is one of the most important things that you can do so that you can take advantage of the compounding interest effect over many years. See below for a simple example of why it is important to invest as early as possible.
Example:
Bob is 20 and he starts saving $5,000 per year until he is 55 which is the age he wants to retire. If Bob does this assuming he earns an average rate of return on his investments of 7% he will have approximately $750,000 at age 55.
Let’s say that Bob started saving at age 30 instead assuming all other facts are the same Bob would only have approximately $339,000 at age 55 which is less than half!
Delaying investing and saving for your retirement can be a costly mistake. The cost goes up the more you delay!
Important takeaways:
If you are young it would be wise to live within your means and not spend wildly, use a budget as a tool to control spending and make sure that you are on track, save enough money in an emergency fund so you do not need to borrow money if something happens, use credit cards responsibly and invest for your retirement as early as possible!
Disclaimer:
This article is for informational purposes only and should not be taken as legal, financial, investment or tax advice. Please consult your advisor.