Some young professionals who are fresh out of college and just beginning to pursue their careers tend to be irresponsible about their finances. Because most of them usually start out low on the totem pole, they believe that they can start learning better financial management skills when they increase their income in the future.
However, this kind of thinking often leads to costly financial mistakes that are actually quite easy to avoid once it is spotted early. Here are 5 of the most common and dangerous mistakes that young professionals tend to make which you should cautiously avoid.
- Accumulating consumer debt
There is nothing wrong with borrowing money for purchases that will prove their worth in the long run, such as a home, a car, or a college education. However, many young professionals tend to borrow when they really do not need to. They rack up credit card debt and personal loans to pay for expensive vacations, luxury items, and other non-essentials.
To avoid the seemingly endless cycle of consumer debt, stop using your cards to finance your lifestyle and set a fixed percentage of your monthly budget aside to pay off your balance. If you find this too hard, try the “debt snowflaking” method. This involves allocating any extra money you come across, such as a tax refund, to pay off your credit card balance.
- Overspending and impulse buying
Overspending is often caused by the failure to realize that little things can add up. Impulse buying, on the other hand, discourages you from following a system for financial discipline. Both of these can adversely affect your finances in the long run.
Understand your financial situation and spend money only on the items that you really need. Be realistic about what you can actually afford to buy.
If you have no idea where to start, consult a financial adviser from Capstone or other reputable organizations that can offer invaluable support, resources, and quality advice to get you on the right track.
- Ignoring the importance of a detailed budget
It may sound so simple, but keeping a budget has saved many young professionals from financial ruin. Set aside fixed amounts for all your monthly expenses. This is an effective way to rein in your expenses and make you more aware of how much you are spending for any given period.
One thing that you should keep in mind is that having a budget does not mean that you have to live an ascetic lifestyle or completely deprive yourself from any kind of luxury. You can still add a line in your budget for “fun money” which you can consider as a reward for getting your finances in order. You can spend this on non-essential items such as a premium latte or a new dress.
- Delaying investments for retirement
Saving money is the first step in ensuring that you have a comfortable retirement, but it is not enough to guarantee financial independence. To build up sufficient funds for your retirement, start investing as soon as possible.
Remember that time in the market is more important than timing the market. The power of compound interest means that those who invest in their twenties will be significantly better off than those who start investing in their thirties.
Warren Buffett, one of the richest men in the world, has also recently underscored the importance of a long-term strategy for investing. If you don’t know where to start your investment journey, check out this list of the best investment trends for the year.
- Paying bills late or only making minimum payments
Many young professionals don’t realize that every missed payment can negatively affect their credit score. A low credit score does not just affect your ability to obtain loans or increase the interest charged on the loans you take out, it also adversely impacts your job and apartment rental applications.
Another important thing to remember is that only making the minimum payments for your credit cards means that the rest of the balance will begin accruing interest. As much as possible, pay off your credit card in full every month to remain in good standing and avoid paying for exorbitant interest rates.
Do not endanger your financial independence and stability by falling into the trap of these common financial mistakes that often plague young professionals like you. You should always remember that your financial habits and lifestyle today will determine the state of your finances in the future. It is definitely never too early to start practicing good financial management skills.