Watch out for that first step into the real world — it’s a doozy.
When you’re first starting out, adulting can be difficult (honestly, it’s tough at any age), and managing money often proves to be particularly challenging. “It’s no secret that new grads are really strapped,” says Natalie Colley, an analyst with Francis Financial in New York. “They feel themselves being pulled in all different directions in terms of financial priorities.” To help you focus and get started on the path toward financial independence, take a look at these common money mistakes that young people make and learn how you can avoid them.
Living beyond your means.
The math is simple: Spending more than you earn equals bad news. “A lot of new grads move to the city, and it’s expensive,” says Nicole Mayer, a financial consultant and partner with RPG Life Transition Specialists in Riverwoods, Illinois. “They’re really spending everything they make.” She recommends adjusting your lifestyle to ensure you’re not overspending. That might mean making small adjustments, such as eating at fancy restaurants less often, or big changes, such as getting a roommate or even moving back in with Mom and Dad for a while, she says. You can figure out where you may need to cut back by keeping a budget.
Going without a budget.
If you’re just skating by and living paycheck to paycheck, you’re bound to fall behind eventually. “When you’re working on such limited, finite income, the only way to get a really firm control on what is coming in and what’s going out is to have a budget,” Colley says. You can keep track of your income and expenses with budgeting sites and apps such as Mint or Personal Capital. Or do it yourself with a spreadsheet or pen and paper. Whatever your method, once you see your expenses laid out, you can identify where you may be spending too much and what goals you’d rather put your dollars toward.
Waiting to start saving and investing.
When you’re young, you may not have much money to work with, but you have plenty of time to put your money to work. So be sure to start saving and investing as soon as possible. “To young people and new grads, time is your friend,” says Vid Ponnapalli, a certified financial planner based in Holmdel, New Jersey. “The power of compounding is huge. So I always say to start now, and then save and invest, so you can reap the benefits of dollar-cost averaging.”
Skipping saving for emergencies.
You can always count on the unexpected to happen, whether it’s an actual emergency, such as a car accident, or just an expense you forgot to budget enough for, such as your cousin’s wedding. That’s why you need an emergency fund. “It’s going to be really important to help you from sliding back into credit card debt,” Colley says. The standard suggestion is to save enough cash to cover at least three to six months’ worth of expenses. But that can be a daunting amount, especially when you’re just starting out. Instead, Colley recommends first shooting for an easier target, such as $500 or $1,000. Then, add to that amount each month while also saving toward other goals.
Missing out on a Roth IRA.
You might think you can skip saving for retirement because you won’t be retiring for forever. And that might be literally true if you don’t start saving as much as possible now. Using a Roth IRA is one of the best ways to get started. In 2017, you can save up to $5,500 a year. Unlike a traditional IRA, you don’t get a tax break on your contributions now, but once you withdraw your cash in retirement, it’ll be tax-free (providing the account has been open for at least five years and you are age 59 1/2 or older). So you save on taxes for all the earnings you’ve built up over those decades.
Foregoing your employer’s 401(k) contribution.
Before even saving in a Roth IRA, you should first check whether your employer contributes to your 401(k). Often, a company will put in 50 cents for every dollar the employee invests, up to 4 percent of salary. If that’s the case at your job, you should contribute 4 percent of your gross pay in order to capture the full company match. “Not taking advantage of the match is just silly,” Colley says. “You’re leaving money on the table.”
Overusing your credit cards.
Swiping your card or, worse, clicking a few buttons while shopping online makes spending way too easy. “When it’s not physical or tangible, we forget how much we’re spending,” Mayer says. But you don’t have to forego credit cards altogether. After all, if used wisely, your credit card can help you build up your credit score and earn cash back or travel rewards. Mayer recommends recognizing how much you can actually afford to spend and paying off the entire balance every month. And stay well below your credit limit, too. Even if you are responsible and not carrying a balance, a high credit utilization ratio can be a detriment to your credit score.
Ignoring your credit report.
A mistake on your credit report can prevent you from getting a loan when you need it, like when you’re ready to buy a car or house. Be sure you regularly check your report from each of the three credit bureaus, Ponnapalli says. You can do so for free at www.annualcreditreport.com.
Focusing too much on today’s paycheck.
Of course you need a job, but it’s more important that you have a career. Look ahead 10 years and consider where you’ll be work-wise, including whether you think you’ll be happy and how much you expect to be making by then if you continue on your current path. “Don’t stay in a job that is not fulfilling and doesn’t serve a purpose for longer than you need to,” Colley says. “In your 20s, you should really be exploring and figuring out what you want to do long term.”
Thinking you’ll live forever.
Especially when you’re young, it might be hard to contemplate your ultimate demise. But the end is inevitable, and you should have a plan in place for when it comes. At the very least, that means you should have beneficiaries assigned for all your financial accounts, as well as an advance healthcare directive. Ideally, you should have a living will, too. “If you don’t do this, you are leaving everything up to the state rules,” Ponnapalli says. “You need an estate plan so that you control what happens.”
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10 Money Mistakes New Grads Make originally appeared on usnews.com
