For most people, becoming financially literate requires a rather long learning process that is mostly based on trial and error. That’s why our younger years are generally dedicated to making lots of financial mistakes that we later come to regret. The lack of experience and the recklessness of youth can lead to some very serious financial problems, but they are all part of the growing-up process.
That’s not to say only young people make financial mistakes, far from it. It would be unfair to all the adults and seniors who learn nothing from their past mistakes and make poor financial decisions over and over again, or to all the young people who are way more financially savvy than their elders. But it is true that you’re more prone to financial slip-ups when you’re young and inexperienced, and you don’t fully understand the consequences of your actions.
So, now that we’ve added our disclaimer and made sure that nobody gets offended, let’s take a look at some of the most common financial mistakes that people make in their young years.
Spending like there’s no tomorrow
The moment you earn your first paycheck and you don’t have to rely on your parents anymore to give you money, you get a feeling of empowerment and you can easily be tempted to go on a shopping spree and spend it all out. After all, you’ve worked hard for that money and you deserve to treat yourself, right?
But when you do that month in and month out, and you spend every dime that you earn, it’s not called treating yourself anymore, it’s called frivolous spending. If you only think about the present moment and focus on the temporary comfort you feel when you purchase something, it’s going to be difficult for you to put money aside for more important things like purchasing a house, a car, or paying for your studies.
Living paycheck to paycheck
When you tend to overspend, you always end up having zero money in your bank account at the end of the month. Unfortunately, many young people never take unforeseen events into account when they plan their monthly budget (and some don’t even take the time to do that). They simply rely on the fact that they’re going to receive their paycheck each month and that will be enough to cover their expenses.
However, this can give you a false sense of financial security, when in reality you’re just walking on thin ice. What would happen if you’d lose your job or you’d have to pay for unexpected medical expenses? One missed paycheck can spell disaster for your finances and leave you in a very difficult situation. That’s why it’s best to put enough money aside to cover at least three months' worth of expenses in case anything happens.
Buying things you can’t afford
Do you really need the latest iPhone, a brand-new sports car, or a house with five extra rooms that nobody will ever use? You probably already know the answer to that question. And yet, many people don’t seem to follow this logic when making their purchases.
Chances are people can live their life just as comfortably without many of the things that they buy and that put an unnecessary burden on their budget. The rule of thumb here is to ask yourself two questions before buying anything: do I really need this item and can I afford to buy it right now? If the answer to any of these questions is no, then you might want to postpone the purchase.
Not thinking about retirement
When you’re young and healthy, retirement seems like a distant reality, so you might think it doesn’t make sense to start thinking about it right now. But that would be a big mistake because planning for retirement is something you should consider when you’re young and you have the necessary resources to save money.
If you don’t start planning for retirement early on, you might wake up one day and realize that you can’t afford to stop working even if you’ve reached retirement age because you don’t have enough money to support the lifestyle that you’re used to.
Not doing enough research before applying for a loan
Even if you don’t do any of the mistakes listed above, you might still experience financial hardship for one reason or another. That’s when the prospect of taking out personal loans to get back on track, or e-commerce business loans to get a business off the ground, can become very tempting.
There’s nothing wrong with applying for a loan if that can help you solve your problems, but it’s important to do your homework before you sign on the dotted line. You have to fully understand what a loan implies if you don’t want it to add up to your money problems.
Treating credit cards like gift vouchers
Credit cards are very useful, but only if used with caution. Unfortunately, caution is a concept that some young people aren’t familiar with or they choose to ignore because living in the moment is a lot more fun. And that’s how they end up using their credit cards like they are gift vouchers, without thinking that they’ll have to pay that money back at some point.
The smart thing to do here is to use your credit card only for emergency spending, and make sure you pay back more than the minimum amount each month, so you don’t have to deal with very high-interest rates.
Using your savings to pay off debts
Young people often think that they can manage their debts by using their savings, which is possible, but it’s not exactly a smart move to make. While technically you can use your savings to cover your debts, doing that will only make it difficult for you to pay back your retirement funds. If you have to pay your debts urgently, it’s best to look for other alternatives instead and leave your savings untouched.