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.


Dancing in the Rain

About the time that clients were receiving their monthly statements on their investment accounts, my business partner and I noticed an influx of calls and e-mails.  The general question being asked was “Am I okay?”  We work to position our clients in all aspects of their financial lives to make it through difficult financial times.  In our minds, that’s as important as taking advantage of financial opportunities – for some people it’s actually more important.  Our clients know that and generally talk-the-talk and walk-the-walk of diversifying investments, staying calm during difficult times, and making decisions based on factors other than fear or greed. 


But these are pretty unnerving times and even some of the most fearless individuals are beginning to have little beads of sweat popping onto their foreheads.  A friend forwarded this anonymous quote to my business partner: “Life isn’t about waiting for the storm to pass.  It’s about learning to dance in the rain.”


So let’s look at a few “dance moves” for current times:

         Eliminate frivolous items from your spending.  Unless you’re spending more than you make or you’ve lost a major source of income, don’t go overboard.  Everyone needs some rewards built in to their budget. 

         Have funds available.  Make sure you have 10% of your annual pre-tax income where you could get to it pretty quickly and another 20% or so when you could get to it over time or with some tax consequences. 

         Don’t put the rest of your money all into the stock market.  Beyond your highly liquid money, also have some that’s in pretty boring stuff life certificates of deposit and government bonds.

         Stick with quality.  This is a great time to get bargains on quality.  But don’t be speculative.  High quality diversified mutual funds are often better for the average consumer than individual stocks or mutual funds that concentrate on only one industry.  Professional advice on your situation is warranted.

         Don’t be penny wise and pound foolish.  Don’t be afraid to get professional advice.  Have a pro do your taxes, consult on your investments, and advise you on your overall financial situation. 

         Don’t scrimp on things you’ll later regret.  If you can afford some niceties that are timely, get them.  Buy holiday gifts, get professional portraits of your high school senior, take the vacation you had planned.  Don’t miss meals to do these things, but when times are good again, you don’t want to be sorry for once in a lifetime things you missed. 

         Be patient.  It may seem that the economy fell apart over night.  It didn’t.  The poor decisions and waste that impacted the financial markets and several of our industries have been going on for awhile.  The solutions will take time to be completely formed and implemented and the results will take awhile to be fully realized. 


Mistakes should be learning opportunities, so we should all take note and become wiser.     

Looking at Next Year

Now that you’ve looked at where you’ve been financially in the past year and you’ve seen how you did on some financial basics, it’s time to look toward a financially responsible future. 


On the areas where you spent more than you believe you should have, make a spending plan for those items for the coming year.  Sometimes, it doesn’t need to be in a dollar budget.  For instance, instead of saying that you’re going to spend $100 a month dining out, maybe you say you’re going to eat out twice a month. 


On the items where you’re cutting back, decide what you’ll replace them with.  One fellow financial planner, Bert Whitehead, told of some of his clients who decided to take some cooking classes to replace their many dinners out.  They’d invite friends over for nice dinners and experienced the unexpected bonus that many of their friends invited them to dinner out as a thank you.


Make a monthly spending plan that takes into account saving for items that don’t happen every month – maybe a quarterly life insurance payment, holiday gifts, vacation. 


Put in place some rewards for yourself when you stay on track.  They might be financial rewards – like a weekend trip – or less tangible rewards – like taking a bubble bath. 


During the next year, we’ll look on monitoring your financial progress as well as going in depth on the financial basics. 


In With the New

Finishing up this year well from a financial responsibility standpoint will help get the New Year started right.  So the next few postings will help position folks for that transition. 

         Know where you’ve been.  Look at what you spent and what you spent it on in 2007.  If you use an off the shelf computer program to keep track of your checking and credit cards, look at an annual summary of spending by category and look at the monthly breakdown.  If you don’t, do some monthly summaries by category using a paper spreadsheet. 

         What surprised you?  In looking at your summaries, what did you spend more on than you think you should?  What were you glad to see you didn’t spend too much? 

This will take some time to do, so give yourself a few hours to get your information together.  Then do some serious thinking about what it’s telling you. 

Year End Tips – The Sequel

Cutting Spending During the Holidays

You’ve already bought gifts for everyone and now spending through the end of the year looks like the national debt.  What can you do to cut back spending until your first 2008 paycheck?

–  Eat from the pantry and the freezer.  Granted you might want to get a Holiday Ham (or Tofurkey if you’re a vegetarian), but most of us could eat from our stored food for months if we had to.  Look into the non-perishable items as well as the things in your freezer that you keep “just in case”.  Plan menus around that and only buy what you need to to finish those meals out.

–  Pay bills only when they’re due.  Many people pay a bill as soon as it comes in the mail.  Pay bills about a week before they’re due.  This gives time for the payment to arrive and avoid a late fee, but can often push it into the next pay check for you. 

–  Put off discretionary purchases.  If you can go an extra couple of weeks until the next hair cut, manicure, or poker night (unless you usually win), do it.

–  Eat at home instead of eating out.  That also means you can skip the $4 cups of coffee for a couple of weeks.

Naughty or Nice

In flipping channels the other night I saw an entertainment show report that they’d surveyed some children to find out who would top Santa’s list of Naughty Folks.  Britney Spears and Paris Hilton were at the top.  Everyone makes mistakes and a trusted mentor once said to me, “Feel free to learn from the mistakes of others.  Don’t feel you have to have to make them all yourself.”  So rather than harp on these already over-harped-on celebs, let’s look at a few lessons we can all learn from their over publicized errors.

         Know how much you spend and be sure it’s less than you make.  No matter how large your income, expenses will grow to exceed that amount if you don’t watch out.  So be sure that you save 10% of everything that comes in, keep some extra in reserve for taxes and emergencies, and cut back your lifestyle until you can live on the rest.

         Money can’t solve all problems – especially if a courtroom is involved.  Excellent legal representation is still going to be stuck with the facts of a case and the law that governs.  And sometimes that means that a judge or jury might nor rule the way you might want them to.  (That goes for legal issues other than driving infractions and child custody.)  

         The friends and attention that money can bring are sometimes very fickle.  Some of the people who support you when you’re on top are either not to be found or they’re the ones to throw the first stone when you’re down.  The solution to this is often being a little less public about having money.  Sad, but true.

In the spirit of the season, let’s all give a clean slate to all the folks who’ve had their mistakes and mishaps make big news in 2007 and wish them well in 2008.