5 Financial Mistakes to Avoid in Your Youth
When you’re young, it can be hard to visualize your life beyond your immediate future. But, if you ask any person who’s in the later stages of their life, they’ll tell you that the choices you make when you’re young can have long-lasting effects. They might set you up for success, or they may leave you paying the consequences for a long time. This is particularly true when it comes to your finances: the decisions you make when you’re young can create a solid foundation for the rest of your life, or they can have you playing catch-up long into your future.
In that light, if you’re in your 20’s (or even younger), we wanted to highlight five mistakes you should avoid making with your money if you want to escape financial troubles later in life. It can be tough to stay on track when you want to have fun, but putting in the time and effort to take care of your finances in your youth is well worth it.
1. Ignoring your retirement fund
For many people at the start of their working life, preparing for the end of it can seem unimportant. With so many major financial milestones between now and then, why start putting aside money for retirement today?
However, what you stand to gain by starting to save for your retirement as soon as you can is massive. When you start saving in a retirement account in your twenties, the amount you stand to gain in compound interest is significantly higher than if you start a decade later.
Beyond that, starting early gives you the option to take it easier as you age. If you’ve been steadily saving for your retirement since you were young, you won’t need to worry about it as much in your 40’s, 50’s and 60’s as someone who didn’t bother to start until much later on. But, if you don’t start saving and investing for retirement until you’re middle-aged, you won’t have the option to take breaks. The pressure will be on to keep saving, even if you’ve got other major expenses like kids or face a big financial emergency. This can be really stressful, and might even push out your retirement years later than you wanted to be working. Instead, starting early will mean things are more likely to unfold in your favour.
2. Running up your credit card
It’s hard to get by without getting a credit card. They can be extremely helpful in emergencies and can assist a young person in building up their credit score long before they’re ready to take on other credit products like loans and lines of credit. Unfortunately, most school curriculums don’t cover financial literacy, meaning young people often learn about how to use and manage credit in practice - for many, this can also be referred to as “the hard way”. Overspending and getting hit with huge interest fees is a rite of passage for countless people in their teens and twenties, and in some situations can create a mountain of debt that takes people years to pay off.
If you can, don’t let this be you! It can be tough to live within your means if you aren’t earning a ton of money, but the stress of being in debt isn’t worth it. A credit card isn’t extra income, it’s borrowed income. Learning this fact and practicing how to manage a credit card appropriately is an essential habit that’s much easier to master when you’re young.
3. Having no financial plan
When you’re young, it can be easy to live without a defined plan for your money. Young people often aren’t married and don’t have dependents like children or aging relatives to consider. Plus, the next phase of your life can feel very far away. Getting focused on tomorrow can seem relatively unnecessary.
But, failing to plan when you’re young might put you in a tough spot in the future. If you spend carelessly, neglect saving and coast without goals in your twenties, you’ll be left with less choice and flexibility by the time you reach the next phase of your life. You won’t be able to take the next step because you’ll be paying for miscalculations made in the previous decade.
Instead, think about what you might want to achieve with your money on a short-term and a long-term timeline. Do you want to own a house one day? Think about how your behaviour today might affect that goal. For example, wrecking your credit score by overspending might make it harder for you to obtain a mortgage when you’re finally ready to take the plunge. By setting goals for yourself, you can help you prioritize what’s important and highlight what non-essentials aren’t. Even if your short-term goal is a “fun one”, like taking a dream vacation next year, start planning for it today instead of relying on credit to make it happen.
4. Living with no savings
As you get older and start to take on financial independence, it means you get to make all the choices in how your money is used. Gaining control can be fun and exciting, however, this independence also means that you’re responsible for the not-so-nice stuff too: bills, debt and financial emergencies.
While you can reasonably work bills and debt into your budget, you can’t plan in advance for financial emergencies. Being unprepared to take on an emergency like a huge car repair or getting laid off could leave you in a very vulnerable position. Alternatively, having an emergency fund can help you cover the costs of an unexpected situation and move on without throwing you way off track. This is a prime example of why saving money is so important.
Beyond just being prepared for emergencies, saving will allow you to make purchases without stressing about how you’re going to pay for them. This method can help you distinguish between fleeting desires and things you really want by taking the time to think about your purchase before you commit. When it comes to really big goals, like purchasing a car or saving for a down payment on property, you won’t be able to rely on credit alone. If you start developing the habit of saving when you’re young, you’ll have a well-established routine that’ll make the process much easier for you than people who only get serious about it later in life.
If you want to get started, think about starting a new Saving Jar or a Saving Challenge within QUBER. Once you set your preferences, the app will handle the saving for you - you’ll be watching your savings grow in no time!
5. Taking on debt you can’t handle
As we mentioned above, overspending on your credit card is a surefire way to cause problems for yourself. Because there’s no benefit created from spending on non-essentials like entertainment, all you get in return as you spend is increasing debt, high interest fees and negative effects on your credit score.
But, even when it comes to good debt, it’s important to be very careful in considering what you can afford before you take the plunge. Good debt can be described as any debt you take on to further your life or create value in some way. Examples include a student loan so you can attend post-secondary school and get a degree, or a business loan to cover start-up expenses so you can become an entrepreneur. These types of debt imply you’ll gain some kind of increased future earning potential by taking a loss in the present.
However, take your time before agreeing to take on any major debt, even if it’s supposed to help you get to the next stage of your life. Using the above examples, you might spend tens of thousands of dollars on a post-secondary education to obtain a Bachelor’s degree, but a Bachelor of Engineering and a Bachelor of Arts don’t lead to the same type of career paths. Whereas the former offers very specific training that’s likely to lead to a high-paying job right out of school, the latter is more generalized education that won’t guarantee you’ll be raking in money after graduating unless you’ve got a clear plan for what you’ll do with your degree. Or, starting a business without taking the time to craft a solid business plan might not end in success. You may not turn a profit as soon as you expect and you even run the risk of failure, leaving you on the hook to pay your business’s liabilities without ever earning from it. This isn’t to say you shouldn’t pursue your dreams, but being saddled with a huge amount of debt because of a lack of foresight isn’t in your best interest.