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4 Big Money Mistakes Young People Make

by beconrad 

The schools work well in some areas, but they do a lousy job teaching young people about their finances. Millions of American teenagers graduate from high school not knowing how to balance a checkbook, open a bank account or evaluate an investment opportunity. That leaves them wide open to all kinds of financial problems, from credit card debt to investment scams.

It is no wonder, then, that so many young people make serious financial mistakes as they enter adulthood. Whether they fail to save enough, neglect their retirement plans at work or rack up high levels of debt, bad decisions now could have serious consequences later on. While the following is not a comprehensive list, it does provide a look at the mistakes young people are making, and how you can avoid the same blunders.

#1 – Living Without Health Insurance

The new Affordable Care Act mandates that everyone, including young people, buy health insurance, but many people have not heard the call. Young people often feel like they are indestructible, and that can make health insurance a tough sell.

The penalties imposed by the ACA are not exactly driving young people into the arms of health insurers. Starting at just $95, the tax penalty is much lower than even the cheapest insurance plan. There is another reason, however, for young people to sign up. Illness and accidents can strike at any time, and paying off health care expenses could put everything from retirement savings to buying a home on the back burner. The monthly premium is a small price to pay for peace of mind.

#2 – Not Signing Up for a Retirement Plan

There is no substitute for time when it comes to investing for retirement. Young people who get an early start will need to save much less each month than their counterparts who wait just a few years more.

Workers with access to a 401(k), 403(b) or other retirement plan should take full advantage of it. If matching is available, it makes sense to invest at least enough to get the full match. Otherwise you are just throwing money away. Ramping up the contribution over time is a good idea as well, and many plans provide an automatic escalation plan to make doing so even easier.

#3 – Hoarding Cash

Having a small amount of cash in an emergency fund is a smart move, but keeping all of your assets in the bank is not. Bank accounts pay virtually no interest, and that small return cannot keep up with the ravages of inflation.

Investing can be scary, especially for young people who watched the market tumble while they were growing up. Even so, history shows that stocks have outperformed every other investment. That does not mean putting everything in a single stock, but a well-diversified mutual fund can be an excellent tool for building long-term wealth.

#4 – Using Credit Foolishly

There are times when going into debt is a smart move. Young people who want to buy a house will probably not have the cash to buy the property outright. Taking out a mortgage makes sense, since the debt makes it possible to provide a safe place to live and build equity over time.

Going into debt to buy a meal at a fancy restaurant or a new pair of shoes makes a lot less sense, yet many young people do just that. “Credit card debt is a big problem for young people, and it is easy to get sucked into the debt trap. Young people can fight back by tracking their spending carefully and putting the plastic away after a predetermined monthly limit is reached.” Says Patrick Dwyer former Merrill Lynch Wealth Advisor. Learning to differentiate between wants and needs is another effective way to stay out of debt and keep credit card interest at bay.

When it comes to finances, what we do not do can be as important as what we do. Not going into debt, not putting off retirement savings and not being afraid to invest can all have a positive impact on your financial future.