Three Financial Mistakes for Young Adults to Avoid

There are some great financial strategies that make a sound financial life achievable. There are also some mistakes that can slow down or stop a young adult from getting started on a good financial path.
1. Avoid bad debt. It’s easy to live beyond your means. Credit cards can be a convenience, but in the age of debit cards, there isn’t much need for credit cards. If you use credit cards, pay them off completely each month. Doing this builds your credit history in a positive way, so when you’re ready to borrow money at a reasonable level for a good reason – your first home, a reliable car – it’ll be easier. Also, don’t stress about student loans unless they’re at astronomical levels. Student loans can help get a better earning foundation. They’re cheaper than credit cards and for many people right out of college or trade school, the interest is tax deductible.
2. Don’t try to live your parents’ lifestyle. That doesn’t mean to avoid the Baby Boomer memories of shag carpet and Woodstock. What it does mean is that it took your parents lots of work and time to build up to their current lifestyle. Take a close look at what your current income will allow you to spend. Let that drive everything from how much you pay in rent (maybe a roommate makes sense), what kind of car you have (a solid used car will work until you make more and can buy a new car), and your social life (got to have that – look for fun ways to enjoy friends without running up credit cards).
3. Don’t be without a safety net. If you think, “My parents will help me out if I get in a bind.” Before you let that be your safety net, think how you feel about paying all your parents bills when they retire. They need to be saving for their future and you do, too. So with your income driving your current lifestyle, you’ll stay out of debt. When you decide what you’ll spend, save at least 10% of what you make. For the first year or so, put it in a basic savings or money market account. Once you have the cushion build up, you can start diversifying.
Avoid going the wrong direction as you start out. It saves you the trouble of cleaning up your finances later.

Debt

There’s good debt and bad debt.  Good debt can allow you to acquire an asset with financial advantages more quickly than you could have enough cash saved up to pay for it.  Lots of the common forms of good debt give you a tax break.  Mortgages and many student loans are good examples.  Even a car loan can be good debt.  There aren’t tax advantages for car loans, but if having good transportation allows you to have better jobs and more flexible career options, a car loan that doesn’t overburden you financially could be a good move.

 

Bad debt often comes about when the debt lasts longer than what was purchased.  Your instance if you eat out a lot, charge the meals on your credit card, and don’t pay your balance off every month, that’s bad debt.  And bad debt is usually easy to spot by the interest rate you pay, too.  Mortgages, student loans, and even car notes usually have pretty manageable interest rates.  Lots of credit cards have interest rates so high that just opening the bill will give you a nosebleed. 

 

Ending our Fiscal Fitness review with debt takes as back to where we started.  If you’re saving a portion of everything that you make, you won’t get into debt.  If you’re in bad consumer debt now, take the dual approach of beginning to save while you’re paying down your debt.  When the debt is paid off, you’ll have started the habit of saving and can supercharge your ability to sock away more for your financial goals.

Some Financial Basics

If you’ve done your review of your 2007 spending, here are some items that you should see in the year’s finances.  (All of these assume you’re still in the work force.)

 

         You saved at least 10% of what you made.

         You have at least 10% of your pre-tax, pre-deductions annual earnings in savings. 

         You’ve funded retirement accounts.

         You didn’t spend more than you make, so you pay your credit cards off each month.

 

Give yourself a grade on each of these.  In the next posting we’ll look at how you can prepare for next year.