The money moves you make when you're young are going to set the stage for future financial success -- or make it harder for you to achieve your dreams.
While focusing on financial responsibility may not seem like much fun, young people have the benefit of time and a clean slate when it comes to money matters. If you make good choices from the start, you can make the magic of compound interest work for you and set yourself on the path to success. But, it's important to avoid mistakes that could cost you.
To avoid damaging your financial prospects when you're young, we've got a list of 19 big errors to avoid.
1. Taking on too much educational debt
Student loans are a fact of life for young people, and chances are you're going to need to go into debt to further your education. But, while you may need to borrow for tuition and books, the last thing you want to do is borrow more money than you need.
Avoid borrowing for anything but the essentials -- which means you should live as cheaply as possible and try to qualify for as many scholarships and grants as you can.
The less you borrow, the fewer problems your student loans will cause later in life -- such as preventing you from buying a house because you have too much debt or preventing you from accomplishing other goals since your monthly payments are too big.
2. Getting one (or more) degrees without having a plan
Speaking of student loans -- while taking on educational debt makes sense if it increases earning power, it's not wise to borrow tons of money for a degree that won't pay off. That's especially true if the degree you earn doesn't open up lucrative job opportunities, leaving you struggling to repay what you owe.
Research academic programs you're interested in and schools you're applying to so you can see whether graduates are able to find jobs. And, look into starting salaries of positions you'd be able to obtain with your degree to see if getting it makes financial sense.
If it doesn't, look for alternatives such as cheaper programs you don't have to borrow for. Or, consider taking practical classes in college or grad school while learning about your passions using free online courses.
3. Not researching student loan payment options
There are a lot of bad things about student loan debt -- but there are also some good things too, such as having many payment programs to choose from if you've got federal student loans.
You can opt for income-based payment plans to make payments affordable, or can choose a graduated payment program. You also have the opportunity for Public Service Loan Forgiveness. If you qualify for PSLF, you can have the remaining balance of your debt forgiven after making 120 on-time payments. But, you'll need to understand qualifying requirements and choose a payment plan that makes forgiveness possible.
Some borrowers have missed out on loan forgiveness or have even defaulted on their debt because they're in the wrong payment plan. You don't want to make these mistakes so research all of the options and choose the plan that's right for you.
4. Not using credit cards
Building credit is one of the most important ways to improve your overall financial situation. Your credit score determines whether you can be approved for a mortgage, credit card, car loan, or other types of financing. Your score also determines how much you pay for credit and impacts auto insurance rates. It can even affect job opportunities, as many employers perform credit checks.
That's why shying away from opening a credit card can be a big mistake. The sooner you open a card, the sooner you start to establish a positive payment history. Plus, average age of credit is a key factor that determines your credit score. If you delay opening a card, you won't get that time back and your average age of credit will be shorter than it should be.
5. Using credit cards irresponsibly
While you want a credit card to start building credit, you can easily get into trouble if you don't use your card in a responsible way. In fact, getting into credit card debt is one of the worst mistakes you can make because it can cost you a fortune.
To avoid this major error, don't charge anything you aren't confident you can pay off at the end of the month. By committing to never carrying a balance, you'll avoid costly interest charges.
If you want to build a positive payment history without risking overspending, use your card for one fixed-price purchase each month... like paying for your streaming subscription. Automatically pay off the bill when it's due to build a steady history of on-time payments without taking the risk of using the card and amassing debt you can't pay.
6. Paying bills late
It's hard to get in the habit of staying on top of bills -- but it's vital. Late payments can trigger fees and can sometimes trigger a penalty interest rate.
Late payments also hurt your credit score. Creditors report when you're 30 days late, 60 days late, or 90 days late in paying debt. Late payments can reduce your score by as much as 100 points, which makes a huge difference in eligibility for financing and loan terms when you borrow.
To avoid accidentally paying a bill late, set up automated payments. You can also set reminders on your calendar or apps, and sign up for text alerts from your credit issuers. Just make certain you have a regular schedule for bill payments and get every payment made on time.
7. Overdrafting your bank account
It's not just your credit cards you need to pay attention to -- you also need to be responsible with managing your bank account. Overdrafting it could cost you money because of fees. And, if you do it too many times, you could end up having your account closed and being unable to open a new one because you'll have a negative report on ChexSystems.
Banks look at ChexSystems just as credit card issuers consider your credit history. If you're considered a risky customer, you could find yourself in a situation where you can't form a traditional banking relationship. This makes life very hard because it'll be costly to cash your paychecks or pay bills without a checking account.
Fortunately, it's easy to avoid overdrafts. Use online banking to keep tabs on your account and sign up for text alerts when your balance gets low. If you write checks, remember to deduct the amount from your available account balance. Often, you can avoid writing checks entirely now thanks to online bill pay.
8. Waiting to start investing
When you're young, you may feel like you have all the time in the world to save for your future. But, the reality is, it's much easier to grow your money if you start young and allow time to work for you.
If you start saving at age 20, you'd need to save just $305 per month throughout the entirety of your working life to have $1 million in the bank by age 63. But, if you wait until 35 to begin investing, you'd need to more than triple your monthly savings to hit the same milestone.
You never get back lost time or years of foregone investment returns, so put some money away ASAP to allow compound interest to work for you.
9. Investing in things you don't understand
While you need to invest to build wealth, it's important you don't make bad investment choices due to inexperience.
It's tempting to invest in get-rich-quick schemes that promise the world or to follow the advice of people who advise you on can't miss investments. But, if you don't understand an investment, you make yourself vulnerable to scams.
The good news is, you don't have to know a lot to start investing. You can build a portfolio made up of index funds and diversify your assets with very little knowledge of how the stock market works. You can also use robo-advisers to make investing even simpler, although they charge fees and it's easy enough to pick out index funds on your own so that may not be the best approach.
10. Signing a lease with irresponsible roommates
Finding affordable housing when you're young can be a complicated prospect -- and you'll probably spend some time living with roommates. If you do, make sure your roommates are financially responsible.
If you sign a lease with someone else, you'll typically be responsible for paying the entire rent if your roommate falls through on fulfilling his part of the bargain. You don't want an eviction on your record or a judgment against you for unpaid rent if your roommate fails to pay.
To avoid this, rent only with someone you can count on and make sure their name goes on the lease too. This gives you the peace of mind of knowing they've passed a landlord credit check and legally share the obligation to pay.
Or, consider renting just a room from someone else so you're responsible only for your own portion of the payments and aren't making promises to a landlord to cover the whole costs of the unit.
11. Buying a house before you're ready
Many young people rush to purchase homes because they're tired of throwing away money on rent. Indeed, buying a home can be a great investment -- under the right circumstances. It can also be a financial disaster.
Avoid buying a home unless you know you'll be staying put for at least two to five years. Otherwise, closing costs and fees make it likely you'll lose money on the transaction. Homes are very illiquid assets, so if you aren't confident you'll stay put, you shouldn't buy lest you find yourself trapped and unable to take advantage of career opportunities because you can't sell your home.
It's also important to wait to buy a home until you know you have a steady income so you won't risk foreclosure -- and ideally, you should make sure to have a 20% down payment to avoid having to pay private mortgage insurance.
Bottom line, unless you're financially and personally ready for homeownership, don't make the mistakes of tying yourself down to a house.
12. Failing to live off a budget
When you're starting to earn money, it's tempting to spend it on enjoying life. Unfortunately, failing to take control of money management is one of the biggest mistakes young people make.
Most people aren't really taught how to budget. But, without a budget, it's much harder to make sure you're doing the right things with your income. Making a budget allows you to effectively use your money as a tool, both to have fun now and to set yourself up for future success.
To create a budget, you can give every dollar a job -- including allocating some money to savings. This would mean sitting down and specifying how much of your income will go to rent, transportation, food, savings, insurance, entertainment, and other expenditures.
Or, you can use a simplified approach where you keep your needs at 50% of your income, spend no more than 30% of income on your wants, and save the remaining 20%.
You'll find out what works for you, but make sure you don't make the mistake of having no budget at all.
13. Sticking with a job you don't like for too long
Charting a career path is a challenge, and it's inevitable you'll have zigs and zags. But what you want to avoid is getting stuck in a job where you'll be unhappy every day.
Many young people are influenced by an offer of a generous paycheck and take a position that's not quite right. This is fine if you do it to get experience, but you risk becoming trapped if you get used to a high standard of living and find it hard to walk away from the money.
Others take a dead-end job “just temporarily” and get comfortable or lose the motivation to look for a better position.
While there's nothing wrong with working at a bad job for a little while because you're getting paid well or because you have no other options, don't stop trying to advance your career. And don't feel like you're stuck if you don't like the jobs your education has qualified you for -- start working and look for opportunities to move your career in your desired direction.
14. Not negotiating your salary
No matter what job you take, it's imperative you negotiate your salary rather than just accept the first offer.
Many employers offer a lower starting salary than they intend to pay because they expect candidates to negotiate. If you don't push for better pay and benefits, you're short-changing yourself. This could have long-term consequences, as your future raises are often based on the initial starting salary.
It's uncomfortable to talk about money, but if you're offered a position or a raise, know what you're worth. Do your research online, find out what you should be getting paid, and ask for the money you deserve.
15. Living without an emergency fund
One of the hardest lessons for young people to learn is that financial emergencies are an inevitable fact of life. You may not be used to being responsible for car repair bills or copays for medical care -- but you'll have to get used to it quickly because coping with surprise expenditures is a big part of adulting.
If you don't have an emergency fund to protect you against bumps in the road, it's inevitable you'll wind up in debt. And this debt could be hard to climb out of. To avoid this fate, work on building an emergency fund ASAP with enough money to cover three to six months of living expenses.
These funds will be there for you when you need them, and a problem like a car repair or a hospital visit won't turn into a disaster that derails your financial future.
16. Foregoing health insurance
Health insurance can be expensive, and it may not seem necessary when you're young and in good health.
The sad reality, however, is being healthy today doesn't mean you'll still be healthy tomorrow. In fact, unexpected illnesses and injuries happen all the time -- often necessitating very expensive medical treatment.
If you don't have health insurance, it can be difficult to get the care you need and a minor illness or injury could progress to a major one. Even a minor mishap, such as a broken arm, could leave you thousands of dollars in debt.
Shop around carefully for an insurance policy offering appropriate coverage. You may be able to stay on a parent's health insurance until age 26, or may be eligible for subsidies by buying on the Obamacare marketplace. Whatever approach you take, just get covered.
17. Opening accounts with significant others
When you're young and in-love, setting up house with a significant other seems like the natural next step. But, sharing a credit card or bank account with someone is a much more substantial commitment than many young people realize.
When you co-mingle funds, your partner's financial mistakes become your responsibility. A boyfriend or girlfriend's late payment, over-the-limit charges, or repossession of a vehicle could damage your credit for years to come if you're a cosigner or have a joint account. Further, it could become really hard to extricate yourself from a bad relationship if you've mixed your money.
To ensure a romantic entanglement doesn't cause a financial calamity, avoid combining finances until you're married or very certain you're headed there. Have lots of conversations about how you'll manage money before you open joint accounts, and know your partner's financial history first. Having these conversations may not seem romantic, but unless you're ready to broach these subjects, you shouldn't mix your money.
18. Spending too much on a wedding
If you decide to tie the knot, it's tempting to throw the wedding of your dreams. That's why the average cost of a wedding in 2018 has climbed to almost $34,000. But, before you shell out enough for a new car, consider the big downsides of hosting a lavish affair.
If you have to go into debt for a wedding, just don't do it. Debt could doom your financial future and your marriage by causing fighting if the bills become hard to pay. Even if you have enough savings to pay for a dream wedding, think about what else you could do with that money.
Starting off your life with a nest egg instead of a big wedding gives you more freedom and flexibility to enjoy each other, start a family, and prepare for your married life. Especially when it's definitely possible to have an amazing wedding even on a tight budget.
19. Failing to set financial goals
Finally, another major mistake you could make when you're young is failing to set financial goals.
Being responsible about your money often requires sacrifice, whether that's living on a budget instead of blowing all your cash or opting for a more affordable apartment instead of lavish digs.
If you don't have a reason to behave responsibly, it's really hard to say no to bad decisions and yes to responsible choices. But, if you have goals you want to achieve -- and know what you need to do to achieve them -- you''re more likely to stay on track.
Whether you want to buy a house, retire early, save for a family, or achieve other big things, the time to start planning is now. The longer you put off working towards your goal, the harder it will be to achieve it.
Smart money moves when you're young set you up for a great future
When you're young and don't have a ton of responsibilities yet, you're in an optimum position to set yourself up for a bright future.
It only gets harder to manage money wisely as you take on a spouse, kids, a mortgage, and other big obligations, so set yourself up for success by making the right choices from the start. Your future self will be very glad you did.
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