Finances is one of the biggest areas that the education system fails kids. Learning to properly manage your money should be a required course to graduate high school. I learned about algebra and Of Mice and Men instead of learning about taxes, loans, credit, or investing. That knowledge is crucial for a healthy financial future. This is why I encourage you to teach your children now to set them up for success later.
Here are five mistakes people often make when it comes to their finances. Enjoy.
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1 – Not saving for retirement
Saving for your retirement is something most people do not consider until it is too late. To retire comfortable you need to save up at minimum, $500,000. The goal being one-million but the later will do. In addition, something people do not consider until it is too late is adding a retirement account to complement their 401(k) account. Adding a Roth IRA can benefit you greatly if you max it out per year and contribute to your 401(K).
Starting in your early 20s will give you the best chance at retiring at 62. If you start right after college, chances are you could retire as early as 55. That is my goal but 62 is my worst case scenario.
2 – Eating out too much
You have probably heard this before from your parents but it is true. Eating out can eat into your finances without you even realizing it. On average, without thinking about it, Americans spend an average $20-$25 per week on food. That number might seem low but for someone who is single that is appropriate. If you are dating or married, that number can double or triple. Imagine $20 per week, for 1 year, that is $1,040 you could save. Now imagine you spend that much if not more for years. It can add up to thousands of dollars.
3 – Renting instead of buying
Renting or buying is something you have probably asked yourself at least once. Renting has its advantages, such as no maintenance costs and the only fee you have to worry about is rent and utilities. However, many young people assumed that buying a house is not in the cards for them. Many young folks believe they need to save up a huge down payment to get a house. That is not the case though. Many programs will help with down payments or even remove down payments for your loan.
A benefit to owning a home is you can use the equity later if you want to invest in other properties or get a better home down the road. Imagine this; you buy a house for $180,000. It is a good starter home and you are happy. Fast forward 10 years and life happens and your family begins to grow. It is time to move, over the course of ten years your house value goes up to $240,000, and you have already paid off $40,000 of the loan. This means you now have an access of $100,000 at your disposal. You can now find a house that is big enough for your family without having to worry about the financial cost.
4 – Neglecting your credit score
Your credit score is one of the most important facets of your daily life. Your score controls how you get loans, the interest rate, how much you have to pay monthly, and how credible you as a person. Now only do financial institutions look at your score but so do employers. They want to see if you have a money problem or you are a responsible human being.
Make sure you are being responsible with your money, especially when it comes to any debts you may have. One-time payments and proper credit utilization ratio is key to a good credit score. The number of credit cards and loans you should have is something only you can decide, but whatever the number is, please be responsible.
5 – Not saving for emergencies
Aside from saving for your retirement, saving for emergencies is just as important. You never know when a situation will arise and you will need a few hundred, possibly thousands of dollars to deal with it. A possible situation could be a sudden car repair that will cost you $1,200 to fix or a new roof that could possibly cost you $10,000. Having an emergency fund is crucial for a healthy financial life.
You should have at least 6 months to 1 year of expenses saved incase an emergency hits. Here are some suggestions:
- 6 months income saved in case you become unemployed.
- 2 months income saved in case you have a major home repair.
- 1-month income saved in case you need to repair your vehicle.
Everyone will make mistakes when it comes to your finances. It is important to learn and grow so you can avoid them in the future. Learn to dividend invest, open a Roth IRA, contribute 12%-15% to your 401(K) account, use credit responsibly and most importantly, SAVE! Do not put yourself in a situation later because you did not want to get serious now.