Young people often enter adulthood without getting very much helpful financial advice. There are a lot of pitfalls that can trap a young adult. Avoiding these mistakes can make a huge difference in a young person’s financial security.
Investing too much in a house or condo.
There’s a great temptation, when buying a first home, to stretch to buy the nicest home with the highest payments that can possibly be made each month. If a young person has managed to save a small nest egg, it should not all be used to make a down payment. Being over-invested in a home can make it terribly hard to deal with situations that may arise, such as the need to move quickly to another region, or an unexpected job loss or family illness.
Ignoring the need to save for retirement.
It’s common for young people to think of retirement as being very far away, and to view retirement savings as something they can think about later. On the contrary, it’s important to start saving at least a small amount regularly. Young adults should take full advantage of any savings plans offered by their employer, such as an RRSP.
Not having a budget.
If you don’t have a budget, you are going to be surprised again and again by your account balance at the end of the month. Setting up a budget really helps to plan out how much you need to set aside for different categories of spending. You will have a much better idea of how much you can afford for new expenses, such as a mortgage or car payment.
Using credit cards too freely.
Too many young adults are tempted by the many credit card offers they receive. They may start spending a lot on one or more cards, thinking, “Oh, I’ll pay this off when I get my raise.” This can be a slippery slope into massive debt with high interest rates and should be avoided. View your credit cards as a convenient payment method, and pay off the total balance every month. Avoid these other mistakes as well.
Trying to get by without health insurance.
Young adults feel that nothing bad will happen to them. Some give in to the temptation to skip having any health insurance. This is a terribly dangerous gamble to take. Young people can and do get sick and have serious accidents; big debts to hospitals and doctors can follow a young person for decades and ruin the chance to save money and get ahead financially.
Not having an emergency fund.
Spending right up to the limit is an unwise choice that a surprising number of young people make. With no emergency fund of liquid cash set aside, a young adult may have no option in a crisis other than to borrow money at high interest rates from credit cards or short-term loan companies.
Going deeply into debt for college costs.
While it seems that everyone goes into debt for college, that doesn’t make it a wise plan of action. Young people may graduate and have a hard time finding a job that pays enough to allow them to make payments on their student loans. Students should absolutely minimize the amount of education debt that they incur.
Paying monthly for a high rent apartment.
It’s natural to want to live in the nicest place that you can possibly pay for each month. Young people make the mistake of stretching their finances so far on rent payments, that there’s no money left over each month for anything else. Then they can’t save enough to buy a home, or deal with a financial emergency. They may be stuck in a circular financial pattern where they are never really able to move upwards.
Not saving money every month.
If you aren’t saving some money each month, you really have to make a fundamental change in your spending ASAP. As soon as you reduce that spending, or work a few extra hours to achieve a higher cash flow, consider setting up at least a small automatic monthly transfer from your checking account into a savings account.
Having high car loan payments.
Car loan payments cause many young people to be unable to “get their heads above water” financially. A car is an asset whose value starts to go down the day the car is purchased. Young adults who go out on a limb to make big payments on a new or nearly-new car are often left a few years later with a car that’s worth very little and needs expensive repairs. On top of that, they’re left having to make payments on the car loan. It’s a bad equation all around, and young people should do everything possible to avoid car loans and buy a pre-owned car for cash. Note also how your debt affects your credit score.