Today I’ve got a guest post by Ricky. Ricky blogs about personal finance at MoneyHeroBlog.com.
Millenials entering the workforce, and new to personal finance, are bound to make mistakes when it comes to money. I’ve been there myself, and as a teen and 20-something, I wasted a lot of money on things that I didn’t need.
As I got older and wiser, I started to learn the ins and outs of good money management. Here are 3 mistakes that millennials make with their finances, as well as how to fix them.
1. Using credit cards irresponsibly
When I was 18 and a freshman in college, I was approached on campus by a salesman for a big bank. He asked me if I was interested in opening a credit card. My eyes lit up. Free money! Or so 18-year-old me thought.
Four years and hundreds of dollars in interest later, I finally paid off the card and closed the account. I had turned a $500 credit limit into a thousand dollars’ worth of debt.
Using credit cards irresponsibly is a mistake that many millennials make, and they soon find themselves under a mountain of unnecessary debt. If you do decide to get a credit card, make sure to only use it when absolutely necessary, and pay off the balance in full every month.
After you’ve gotten a good handle on paying your credit cards each month, you can use them as a way to build credit, as well as get rewards. I like to use my credit card for everyday purchases, as I get cash back for every purchase.
But the important part is to pay off the balance in full every month to avoid interest charges. Basically, with the exception of emergencies, don’t put anything on your card that you can’t afford to buy with cash at that moment.
2. Living paycheck to paycheck
A common mistake that many young people make is living paycheck to paycheck. This can be a huge financial drain, waiting anxiously for payday to roll around. When you live paycheck to paycheck, it’s hard to do important necessary things with your money, such as saving or paying off debt.
Fortunately, there are several steps that you can take to break the cycle of depending on your next paycheck.
Create a budget. This is one of the most important aspects of personal finance. Creating a budget and sticking to it will give you a handle on your finances, and you’ll be able to track where your money is going each month.
With a budget in hand, you’ll know where your paycheck is going well in advance, and you’ll be prepared for all of your expenses. So, you won’t have to wait for the next one to come in because everything will essentially be paid for.
Start by writing down every single expense, as well as your income. This will give you an idea of where you can start cutting back on spending. I like to use You Need a Budget (YNAB) to track all of my expenses. YNAB will run you $5 per month, but it’s well worth it.
Cut out unnecessary expenses. After you’ve established a budget, and you see where every penny is going, you’ll be able to cut back in categories where you’re overspending.
Maybe you spend too much each month on eating out, or maybe you will realize that you don’t need that expensive phone plan. This is money that can go toward saving or paying off debts.
Build up an emergency savings fund. An emergency savings fund is vital to good financial health because it will save you in a pinch. Experts recommend keeping a savings fund of 3-to-6-months’ worth of expenses.
This will make sure that you don’t have to turn to credit cards in case of a major emergency, such as a job loss. Start with an emergency fund of $1000, then work your way up to that 3-to-6-month mark over time.
One trick I used to build up my emergency fund was a mental one. Every time I found myself wanting to spend money unnecessarily on something, I would take the amount that I would have spent on it and put it into savings.
Weird, I know, but it worked for me. I still got the satisfaction of spending money, but I spent it on something even more worthwhile than what I originally wanted to buy.
Pay off debts. This one is pretty straightforward: pay what you owe. When you owe less money, you have more for yourself. Getting out of debt will help you stop living paycheck to paycheck because you’ll free up cash flow on the monthly payments (plus interest) to your loan companies. Thus, you’ll have more money in your own pocket!
3. Not planning for retirement
Many millennials put off planning for retirement until a later date. Retirement feels so far away, and so they don’t make it a priority. However, this is a big mistake. A plan for your golden years is an incredibly important part of sound personal finance.
If your employer offers a retirement plan, such as a 401(k), make sure to take advantage of it,
and save early and often. The same goes for other tax-advantaged retirement accounts, such as an IRA (individual retirement account) or an HSA (health savings account). All three types of account are tax-free, as long as you don’t withdraw prior to retirement age.
Thanks to the power of compound interest, your money will grow over time. If you invest $500 per month at a 6% return rate until you turn 65, you’ll have $1.5 million by the time you retire.
If you invest the same amount at the same rate but start at 30, that number drops to about $700k. So that $70k that you would have invested between the ages of 18 and 30 equates to a difference of $800k in retirement! The most important part of investing is time. So it’s extremely important to start saving early!
These are just a few of the many money mistakes that you can avoid. With a little time and discipline, you’ll be well on your way to being a master of your finances!
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- While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.