We all make mistakes in life. But some mistakes may end up costing us dearly in the future, quite literally. Here is a list of common financial mistakes young people make that you might want to avoid in your life:
Not Planning for Retirement
Retirement may be far from your mind as you enter a career in your twenties and early thirties. If you currently donâ€™t have a plan for retirement, you may be making a huge financial mistake. According to research, a vast majority of people in their twenties are eligible to make 401(k) contributions but donâ€™t actually do so. The result is a lack of solid retirement planning that could cost them dearly later on. Obviously, young people may have a more pressing need for money, such as to buy a house or car, to actually saving up for retirement. Think of your retirement plan as being just as important as buying a starter home. The problem is, the longer you wait to start saving for retirement, the less time the compounding factor has to kick in and make your contributions lucrative. Also, the longer you wait, the more money you will have to save when you are older, to have enough funds to retire comfortably when the time comes.
Investing Only for the Short Term
Itâ€™s quite tempting in your twenties to trade penny stocks to earn some extra cash as supplemental income, however, buying and selling low-cost stocks is not a suitable long-term investment plan. Any decent investor must plan for the long haul. Thereâ€™s nothing wrong with taking on short-term investments, however, these must be balanced against long-term ventures. The problem with short-term investing is that you cash out early and spend the money quickly.
The money doesnâ€™t have years to compound. Thatâ€™s not really a viable investment plan that could secure your finances for years to come. Therefore, aim to develop a diversified portfolio that could generate returns steadily for years.
Buying a Home Worth More than What You Can Afford
A home is an investment in your future, therefore, it may seem like a good idea to punch above your weight and take out a massive loan for an expensive house. The home value would hope to only increase in the future, but you may be making a devastating cost calculation when you do this. You can only own a home if you can afford the monthly mortgage payments. If you take out a mortgage that you can barely afford, then your risk of default is very high. A financial emergency in the future could put you at a serious disadvantage. In this sense, you may not really be making a sound investment by purchasing an expensive home you canâ€™t really afford. The monthly mortgage should not be above one-third of your income if you want to become a homeowner in the future.
Paying Only the Minimal Requirement or Just the Interest on Loans
If you want to pay down debt, then you need to pay more than the monthly minimum required on loans. Never pay just the interest on loans. Time is of the essence when you want to reduce debt. Always keep in mind that the compounding factor on interest is working against you, therefore, actively reduce the balance on the debt to start the process of eliminating it entirely. A single payment above the minimum would slash the debt right away without you even knowing.