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.

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College Loans Now

Our nation – both the citizens and the government – is drowning in debt right now.  Too much debt, much of it poorly structured, has put our economy in a slump.  So it may seem foolhardy to consider getting a loan for college now.  But there can be good reasons for getting a loan and higher education is one of them. 

 A “good debt” is one that allows the borrower to have something of value that will appreciate over time.  And the debt allows the person to obtain this asset with growth potential much sooner than if they had to wait to pay for the asset in cash.  An education that will allow greater earnings for the rest of your life can be worth borrowing for.  Government subsidized loans with low interest rates are optimal.  The Plus loans generally carry higher interest, so make sure that you can’t get tuition reduction or do a work/study program before getting into that tier of student loans. 

An element to examine closely now is taking a loan now that you’ll repay with an existing 529 plan or other savings that have been in the stock market.  There may be future growth in these accounts that would be worth waiting to receive.  You can pay the loans back early, but you generally can’t get college loans after you’ve take the courses and paid the tuition.  This is one of the areas where some professional advice can help you make an informed decision relative to your particular circumstances.

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.