The Biggest Money Mistakes That Young Professionals Make
Get to know the biggest money mistakes and financial mistakes that young professionals make in their 20’s.
Being financially independent is something most young professionals long to be. Though, attaining this is something that doesn’t come easy. But, it is achievable if you avoid the biggest money mistakes young professionals make and apply the appropriate knowledge to making smart money decisions and becoming financially healthy.
You must realize that bad financial habits can derail your journey towards financial freedom. So, let’s talk about the biggest money mistakes that young people make.
10 Biggest Money Mistakes That Young Professionals Make
1. Not having a savings account
Many young professionals are guilty of the offence of not having savings. Many of them don’t even bother setting up a savings account.
As a young professional, one thing you should know is that anything can happen in the future. An incident like fixing your damaged car, having to sort out unplanned hospital bills, relocating due to a natural disaster, and so many uncertainties of life, is capable of running down your account. So, it is vital for you to always be financially ready for the vagaries of life, and the best way to do that is to have savings.
As the saying goes, little drops make a mighty ocean, that is how little savings can grow to mighty savings. Do you know that you can save 100 dollars or 150 dollars every month and make reasonable savings at the end of the year?
2. Not saving for retirement
One of the second biggest financial mistakes that young professionals make is not saving for retirement. According to a 2018 E-Trade report; over a third of millennials make withdrawals from their 401(k) plans to pay for a personal expense, vacation, or big purchase.
This means a great many are not serious about their retirement plans yet.
You must always remember you won’t work forever. Retirement might also come sooner for most people than others. So it’s always important to place funds aside for retirement. As a general rule, about 15% of your pre-tax income every year should go to a savings account. If you are employed, your employer may match your contributions to a certain percentage to help create your company retirement fund such as the 401 (K) plan.
Do also remember that the excuse that you don’t make enough money isn’t enough. No matter how much you currently make, you can restructure your lifestyle to live on less than you make to allow room for retirement savings. Even setting aside $20 every month makes a huge difference.
3. Spending heavily and carelessly
Spending cash heavily and frivolously is something common with young professionals. They don’t know that getting bankrupt begins with excess spending. You must remember that achieving financial freedom doesn’t come from lifestyle inflation- which is the act of increasing your spending as your earnings go up.
Every outrageous and careless expense drags you down to a low financial level. For example, that dinner you eat in that very expensive restaurant weekly can add up to several thousands of dollars at the end of the year. Some might warrant you using your credit card to pay or are even set on auto payment. You also don’t need a bigger apartment just because you got a raise. You don’t also need to go on that expensive vacation because you received a bonus.
To avoid this serious financial mistake, you must focus on the bigger and more meaningful picture. Build a well-structured long-term (and short-term) plan on every dime you make and start making smarter decisions about how to grow your money.
4. Failing to prioritize their health
As a young professional, you might be vibrant and very healthy. Your sound health might make you feel on top of the world and tempt you to live recklessly. We must always remember that just like our cars, we must take good care of our health. If you can’t let your car rust away, then you shouldn’t allow your health either.
To live longer and free yourself from unwarranted health expenses, you have to be proactive about your health. Exercising regularly and eating healthy foods is a fine way to begin a healthy routine. If your organization has health coverage, then it is good you utilize your employee health benefits by going for regular checkups and screening. If you are self-employed, that shouldn’t stop you from getting good medical insurance. The bottom line is that regular checkups and tests help you identify any health issues on time before they become a serious concern.
5. Living on paycheck to paycheck
One of the biggest money mistakes young professionals make is living from one paycheck to the next. This lifestyle soon becomes detrimental as the temptation to overspend sets in and before you know it, you are depending on the next paycheck to pay the bills of the previous month. As said earlier, you should always be goal-oriented about your money. Think about how best you can profit from your funds through delayed gratification to foster your saving and investment habits.
6. Misusing credit cards and allowing the debts to pile up
Credit cards come with an intense temptation. They seem easy to use. With just a swipe or tap, you’ve paid for something you can always ‘pay back’ in the future. This is equally compounded by the fact that paying back in a month, might only require paying the minimum which in turn means you carry that debt for longer than you should.
While you want to use credit cards to build or rebuild your credit, you must be disciplined and responsible about it.
A good credit score should be the goal when using credit cards. As your credit score can determine whether you get approved for an auto loan, personal loan, mortgage or even renting an apartment. So you should focus on using your credit card for valuable and meaningful purchases.
Sadly, many young professionals get carried away by the ease of using credit cards, that they begin buying things they don’t really need. We often forget that credit cards also come with interest rates. This is a surefire way of stacking up enormous debts for yourself in the future. Hence one of the biggest money mistakes that young professionals make is failing to understand how to use their credit cards responsibly.
A survey by CreditCards.com recently uncovered that 23% of millennials have been carrying an enormous balance on their credit cards for at least a year. As said earlier; always use credit cards for valuable and meaningful purchases. But then again, never rely on it to pay for life necessities and don’t overspend on things you don’t need.
7. Setting up automatic pre-payments for everything
Young professionals like things to occur easily for them, so most times they set most of their bills on automatic pre-payment or renewal. Having automatic pre-payments for everything is part of the biggest financial mistakes young professionals make. While it might seem convenient, you need to be clear about where you use it. For instance, setting up automatic pre-payments to settle debt is an excellent decision.
But, setting up automatic pre-payment for movie subscriptions is an alarming choice. Let’s say you’ve been too busy with work to actually use that subscription. That means you are paying for services you aren’t using which is a waste of funds. Some of us even forget to cancel the auto pre-payment after the novelty of using that service fades away. So before long, we keep paying bills that can’t be accounted for.
The auto-prepayment may even run undetected for months until it drains your account. For instance, paying $15 a subscription may not seem like much, but when you are paying 6 $15 subscriptions you don’t need, you end up spending over $1,000 a year on movies, you don’t watch.
To avoid this mistake, only set up auto pre-payments for things that count such as your light bill, and debts. If you can’t keep track on your own, set email reminders or calendars to monitor them.
8. Paying bills late
As I just said, you should only use auto pre-payments where they count and that’s especially with your bill payments. Missing payments or paying bills late can actually significantly affect your credit history. So you want to set up automatic pre-payments for essential bills such as:
- rent or mortgage
- utilities (gas, water, electric)
- car payments
9. Not having credit cards
Unless you are trying to build good financial habits, having credit cards is actually important. DO realize that not having any credit means you won’t have good credit (FICO) score. Hence, when applying for loans, financial institutions such as banks don’t know how to place you. They simply can’t tell if you are ‘creditworthy’. Your credit score is calculated based on:
- payment history
- debt to available credit ratio
- length of credit history
- new credit applied for
- type of credit in use
Hence you do build your credit history. But as said earlier, you must use credit responsibly.
10. Not Annually checking your credit card report
A lot of young adults do not realize that they are entitled to a free credit card report annually. Some even assume that checking their credit hurts their credit score. It’s highly important to check your credit report frequently to ensure that there are no discrepancies.
This ensures that when you actually need that credit card report for things such as getting a loan, you won’t spend a lot of time trying to fix discrepancies that may have lingered for too long.
11. No emergency fund and rainy day fund
The lack of emergency funds is also part of the biggest money mistakes young professionals make. It’s easy to get carried away with just spending cash on your daily meals, rents, and other regular things. Or perhaps, you are focused on saving for that long-term goal of getting a house. Sure, there’s a need to pay for all these necessities. But then, life is filled with uncertainties. Anything can happen at any time. This is why you should always have a rainy day fund and an emergency fund.
Now see that I actually talk about two different funds; rainy day fund and emergency fund. They are both important security nets and although they seem similar, they serve different purposes.
An emergency fund is a safety net for huge financial emergencies such as illness, injury, or job loss. A rainy day fund is intended for smaller and more predictable expenses such as fixing your electronics, sink repair, or a trip to the mechanic.
Emergency funds typically should be three to six months cushion of living expenses. However, to calculate your rainy-day fund, you need to create a bank of expenses you’ve handled in the past three months and figure out those little things that pop out here and there. That’s how you get a handle on potential future expenses that you come from your rainy day fund.
12. Not investing in the stock market
Over 37% of young Americans under the age of 35 own stocks compared to 61% of people over the age of 35 that own stocks. This is a huge discrepancy. Sure, some risks come with opening an investment account, but you can equally manage this risk and get involved in this amazing way of growing your wealth. You should get rid of the mindset that saving money alone is a way to build better financial habits. Investment is just as important as well.
If you are clueless about how to invest, consider working with a financial advisor.
13. Taking loans you can’t really afford
Banks and FinTech in present times have made it easier to access loans now more than ever. Once they have a glimpse of your potential living expenses, utility payments, and lots more, they actually offer loans that are higher than you can actually afford to pay. This is especially the issue with Payday loans.
This might seem like a delicious prospect – all that money to sort out the things you seem to need at your fingertips. But before long, you find yourself drowning in debt. It’s high time, you pull out a sheet or financial app and start keeping track of your true net worth. So before you take that large loan, you need to evaluate your monthly and yearly budget with a critical eye. That way, you have a complete picture of what happens if you take on that loan.
14. Lacking a budget
Most at times, young professionals live above their means. They usually don’t even have a budget to help them control or guide their expenditures. This act might appear to be normal in the meantime, but might be very detrimental in the long run. When asked why they spend without control, they have lots of reasons to justify reckless spending.
Therefore, to avoid the mistakes young professionals make, you must endeavour to make sure that you never live above your means. To do that you have to have a budget. A well-crafted budget that you can stick to is just what you need. This might require you to rent an apartment rather than buying a choice building in the city, or not driving the latest car model. Bills especially creep in when your visit the grocery store or mall without a budget in hand. You end up getting distracted and picking up way more than you need. A budget will actively help you guard against such frivolous spending habits.
15. Not protecting against identity theft
Identity theft includes but is not limited to occasions where a third party:
- uses your credit card numbers to make purchases
- uses your bank account numbers to write checks, withdraw or transfer money
- uses your social security numbers to obtain utilities or housing
- uses your personal information to obtain documents in a person’s name but with a different picture.
Identity theft is a serious concern and growing at an alarming rate.
In 2020 alone, the FTC received 4.8 million identity theft and fraud reports. Many such cases come from small-time earners like you and me. So you must realize that you need to protect yourself early enough from such an alarming issue. Here are some things you can do:
- use different passwords and keep your passwords safe
- check your credit report regularly for any unauthorized activity and report that activity immediately
- Never carry your social security cards or have their numbers written down in your wallet or purse
- don’t throw away documents with personal information, always shred them
- Be wary of suspicious emails or phone calls that try to ask for personal information
- Practice safe internet surfing habits.
16. Nothing negotiating or looking for discounts
Paying fully for everything, or for any product or service, is a prevalent financial mistake that most young professionals are very fond of. Some young professionals even go as far as shopping in choice stores and very expensive boutiques. They may be doing all these, just to feel good or create an impression. But, in the long run, they will be spending lots of money unnecessarily.
Always take time to negotiate and search for discounts before making any purchases.
For instance, if you want to embark on a journey, it is better to look for discount packages. If possible you can make both your flight and hotel bookings long ahead of time, just to save some money. You can even decide to drive your car down if possible, just save some extra cash. As a young professional, you can also look into amazing discounts from auto repair shops, energy firms, savings with car insurance companies, and many others.
17. Not paying attention to sensitive details
Several young professionals don’t bother taking note of vital details when it comes to things that involve money. For instance, if some paperwork is handed over to a young professional to sign before a deal is closed, most young professionals would not even take out time to read the documents before penning down their signatures. They will just go ahead and sign it. This is a terrible mistake that will cost them so much in the future.
So, as a young professional, ensure that all documents are well scrutinized before you sign them or pay for any bill. It is also good that you go through all the bills to ensure that you are getting the service that you pay for. If by chance, you spot that you are paying for services that are not essential to you, then promptly get that cleared. Other things that you need to check out for are loan agreements and credit card agreements. They might bear some massive interest rates or other hidden charges that might make you spend more money.