Top 5 Money Mistakes to Avoid by Young Adults
Navigating the financial landscape as a young adult can be challenging, especially when common pitfalls can derail your future goals. Read on to learn how to avoid these frequent mistakes and set yourself up for financial success.
1. Not establishing a budget
Establishing a budget is the first step in any financial plan. A budget can help you identify spending leaks, develop a practical savings plan, and ease stress and anxiety.
Specifically, a zero-based budget means that every expected dollar of income has a plan before the month ends. This could be for expenses, paying down debt, savings, charity, entertainment, or investment. When you give every dollar a purpose, you can control leaks and ensure you’re maximizing the effectiveness of your total income while also regulating your spending, not failing to set money aside for an emergency fund, retirement, etc.
2. No emergency fund
Why do you need an emergency fund? The reason is simple: no one can predict what is going to happen. Emergency funds help you in a time of need, without having to rely on credit cards or take out loans. Your long-term goal should be to establish an emergency savings account to cover three to six months’ worth of living expenses. Your living expenses may include your rent or mortgage, utilities, and groceries.
Saving three to six months’ worth of living expenses may seem like a daunting task, so start small—having $1,000 can help in many situations and you can build your emergency savings account.
Because an emergency can strike at any time, quick access to your funds is crucial. It is also essential to have your emergency fund separate from the account you use daily, so you don’t accidentally dip into your reserves. Texell’s Save First Account is designed specifically for your emergency savings with an ultra-competitive rate. It also helps you think twice about withdrawing money for non-emergencies, as the rate is decreased for the quarter if you make a withdrawal.
3. Racking up debt
From student loans, to your first car, to using credit cards to buy clothing, vacations, and other expensive items, debt makes the price of all these times a great deal more expensive. Debt can have long-lasting effects that extend beyond the immediate financial strain. Debt can hinder your ability to buy a home, start a business, or start saving for retirement. It may also limit your financial flexibility and opportunities. For example, you may be less likely to pursue further education if you have substantial debt.
Let’s focus on credit card debt for a moment, as it is easy to get and can lead to trouble if you lack discipline.
• Credit card debt can impact your credit score. When you carry a high balance relative to your credit limit, your credit utilization ratio increases, which can negatively affect your credit score. A lower credit score can make it more difficult to qualify for loans, mortgages, and even rent an apartment. If you miss a credit card payment or make a late payment, your credit card will further damage your credit score.
• The most immediate and pressing consequence of credit card debt is the financial strain because of the credit card’s high interest rates. Credit cards often come with an interest rate over 20%, so even a small balance can become a significant debt over time. If you are only making the minimum payment on your card(s), only a fraction of your payment is applied to your balance, the rest is applied to interest. The example below illustrates how paying only the minimum payment affects your repayment timeline and the amount of interest you pay, IF you stop using the card.
If you find you’ve racked up a lot of debt, read our article Popular Strategies to Get Out of Debt to become debt-free.
4. Putting off retirement savings
Once you’ve established your emergency savings account and paid off your debt, incorporate retirement funding into your monthly budget and invest it in a separate account or through your employer’s 401(k). If your employer does not offer a 401(k), consider a Roth Individual Retirement Account (IRA) to help you set aside money from every paycheck for your retirement.
Consistent retirement savings from a young age can have a significant impact on your total return. The following examples are based on an annual salary of $50,000 and assume a 10% annual savings rate and a 7% annual rate of return.
Compound savings based on the age you start:
By investing while you’re young, you harness the power of compound interest and make it a habit to set aside money in your nest egg.
5. Not having renter’s insurance
Buying renter’s insurance may seem like an unnecessary expense until you experience a fire or theft in your rented home or apartment and lose some—or all—of your possessions. Renter’s insurance provides important coverage. If a fire or similar incident destroys your home and you don’t have renter’s coverage, it would be up to you to replace everything you own. If someone gets injured inside your rented home or apartment and sues you, a renter’s policy also provides liability coverage. Also, if you can’t live in your rental temporarily, your renter’s policy covers your additional expenses while you live somewhere else. This may include hotel expenses and meals.
Renter’s insurance is probably more affordable than you think. The average premium in Texas is under $200 per month.¹ One way to further reduce costs is to bundle your renter’s policy with your auto policy.
You can get a free renter’s insurance quote today from our Texell Insurance Agents, who will work to find you the best rate. Visit TexellInsurance.com for more information.
We’ve highlighted some common financial mistakes young adults make. It’s important to resist the pressure to keep up with others. Living within your means involves making mindful spending choices, avoiding debt, and focusing on long-term financial goals.
¹ The Best Renters Insurance Companies for October 2024 from Nerd Wallet.
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