Money Mistakes to Avoid for Younger People
People of all ages and walks of life make financial mistakes. It’s a part of life. Some of the most damaging mistakes that a person can make occur in their early twenties. I would like to discuss some of the mistakes that I have made, as well as mistakes that I’ve seen others make that have impacted their financial future.
Time after time, young people opt out of their 401(k) contributions altogether. This decision is not without grounds of course; humans tend to value current consumption more than future consumption and more money in your paycheck is certainly a great incentive to skip contributions. Most people beginning their adult careers have very little education when it comes to what a 401(k) actually is, what compound interest is, and how it all ties together. Just because the public school-system has failed to educate you on this point does not diminish the importance of it all.
According to a survey by Money Under 30, 51.6% of Millennials are not contributing to a 401(k). So, the majority of Millennials, the majority of young people out there are saving nothing in their 401(k)s for retirement. This has the potential to turn into a massive problem 20, 30, or 40 years down the road when this group of young people are looking to retire and they’re wondering why they have no money to retire.
The most important thing to understand here is what compound interest is and what is called the ‘time value of money’. Plus, the simple fact that you must give your money a long time to grow into a meaningful amount. Consider you decide to contribute one hundred dollars a week to your 401(k) (which is a relatively small amount of money). Assume an average return of around eight percent per year. Suppose you decide to do that from the age of twenty to sixty-five. By the age of sixty-five, you will have racked up 1.86 million dollars. This is a very nice sum of money to retire on.
Now, suppose your friend decides to delay their contributions until their thirtieth birthday. So, they only contribute from the age of thirty to sixty-five. At the exact same yield, they will only have racked up eight hundred twenty-seven thousand dollars. That is a one-million-dollar mistake on their part. The important take-away here is that you give your money time to grow. The importance is less on the amount of money that you invest and more on the amount of time that you give it to grow. So, if you know for a fact that you are not contributing to your 401(k), then as a young person, it’s never too early to start. I strongly recommend it. It’s a no-brainer especially because most of the time, your employer will match your contributions. Even if there is an upper limit on the amount that they will match, always be sure to max the limit out every year.
Cars are a depreciating asset. The assets that you want in your life are appreciating assets like stocks and bonds and real estate; generally things that go up in value. While a car is technically an asset, most cars are depreciating assets. This means that every single year they are worth less and less money. If you were to make the mistake of going out and buying a brand new car, or buying an expensive car, you will end up upside down on that car to the point where what you owe on the car is greater than the actual value of the car. You will get stuck paying back this car loan for years to come on a car that’s not even worth what you owe one it.
How much money should you be willing to spend on a car? Your total monthly vehicle expenses including insurance and the car payment should be no more than ten percent of your gross monthly income. This will keep you out of trouble when it comes to vehicle expenses. Standard maintenance and unforeseeable expenses can get expensive when it comes to a vehicle in addition to the monthly payments just to have it.
Suppose you make five thousand dollars a month in gross income. This means that your total vehicle expenses should be around five hundred dollars. That’s maybe a four hundred dollar car payment and a one hundred dollar monthly insurance payment. The trouble begins when you run into somebody with three thousand dollars in gross income with seven hundred fifty dollars in vehicle expenses per month.
Student Loan Debt
The problem with student loans occurs when people are going to college for what is known as a non-marketable skill. Something that is not very useful. A degree that is no going to allow you to make decent money and then you accumulate massive amounts of debt. In some cases students rack up six figures of debt with a degree that’s not going to earn them any money. A more profitable route to go is a technical school for a skilled trade (unless the degree you want to pursue is marketable of course). Whether studying to become a plumber, electrician, or carpenter, these are skills that don’t require you to go to college or go into debt. You will be making a lot of money by the end of your training.
At the end of the day, the most important thing is that you are doing what you are passionate about. If you don’t want to be an electrician, then it’s obvious that you shouldn’t pursue a career in that field. If you plan on going to college, at least have some type of plan as to what you’re going to do after college and how much money you can make with the degree you go for.
Consider you’re living in your home and all of a sudden, a pipe bursts in the basement. You immediately think, ‘I need a plumber.’ You will never be in a situation, however, where you think, ‘I need an art history major.’ Art history is just not a skill that is in high demand. Plumbing, electrical work, or carpentry, however, are all skill that will always be in high demand. Plumbing is not for everybody, but all technical jobs spell job security. There will always be a need for people who can build homes and fix them once they break.
Don’t get me wrong, I have three cats myself. Their names are Tom, Gypsy, and Tootsie. Pets, however, are one of the worst financial mistakes that a person could make in their twenties. I love my pets and all, but if you strip away the emotional attachment, all pets are money pits. I’m not saying that you shouldn’t own pets if you truly want to. There are many upsides to having them around. I only suggest that you consider the financial ramifications to owning a pet, which most people don’t do. It may be something that can wait a little more time until you are more financially comfortable.
As an example, consider my three cats. I typically spend roughly thirty dollars a month in food, forty-five dollars a month in litter, and about three hundred dollars per cat, per year in vet visits and shots. Some people pay for pet insurance, but I chose not to. The going rate is about one hundred twenty dollars a month. Depending on where you live, you might also need to pay pet rent. I pay and extra fifty dollars per month per cat at my apartment. It all adds up.
As a general rule of thumb, it will cost you about one hundred fifty dollars per month, per pet. If you choose to opt out of pet insurance, there will be more unforeseen expenses too.
You’re going to lose money when you risk your money, but you don’t always have to. Risk can be one of the greatest things that you can do financially. Whether it’s risking the time that you put into something or the money that you have saved up risk can pay off in the long run. You have a whole life ahead of you to offset that risk. I’m not talking about the lottery here, I’m talking about investment of your time, money or both.
College is a huge risk. You spend 2-7 years of your life earning a degree and hoping that it will pay off in the future. Sometime it does, and other times, you end up in a field that is not at all what you went to college for and the investment then becomes a sunk cost because you spent all of those years not working and accumulating debt.
The stock market is a huge financial risk. Even if you know what you’re doing, it’s difficult to place money in the right vehicles to earn a profit. There are mutual funds out there for people with a high risk tolerance, however, and these typically can pay a large return.