David Lerner Associates: Financial Mistakes Young People Should Avoid
In a recent article, we offered some financial tips for new college graduates as they head out into the “real world” to find jobs and support themselves, often for the first time in their lives. In this article, we take a look at the flip side — below are five financial mistakes that young people should try to avoid.
1. Not contributing to a retirement plan as soon as possible.“When you consider the long-term implications, this may be the most costly mistake young people can make,” says David Lerner Associates Branch Manager John Koene. Though retirement might seem like it’s a long way off, the early years in a young person’s working career are extremely important when it comes to retirement savings due to the power of compounding interest over time.
Of course, most young people just starting out in their careers are earning relatively small salaries compared to what they might earn later in life. But Koene says this shouldn’t be an excuse for not saving something for retirement — especially if their employer offers a 401(k) plan match. “This is the closest thing there is to free money.”
2. Being too conservative with long-term investments.Every individual must determine the level of his or her risk tolerance and balance their own risk vs. reward equation. But some experts say that it may be wise for young adults who have decades ahead of them before their actual retirement date to assume a little more risk with their retirement savings than older individuals for whom retirement is much closer.
“This is because young adults have a longer timeframe during which they can potentially make up for short-term losses incurred due to the potential volatility of riskier assets like stock and stock mutual funds,” says Koene. For example, if an individual invests $500 per month in a money market savings account earning .5 percent, this would grow to only $194,157 in 30 years. But $500 per month invested in riskier assets that earn an average annual return of 8 percent would grow to $745,179 in 30 years.
3. Not establishing an emergency savings fund.While saving for retirement is an important long-term savings goal, it’s equally important for young people to focus on building a short-term emergency savings fund. “This is money that is saved in a bank savings or money market account so it can be easily withdrawn if needed for unexpected expenses or in the event of a job loss, Koene explains.
Having an emergency fund like this to cover things like car repairs or other unexpected expenses also helps young people avoid getting into credit card debt early in their lives. “Excessive credit card debt is like a weight that drags young people down financially and can keep them from meeting other financial goals throughout their lives,” says Koene.
4. Not keeping an eye on their credit score.According to Koene, an individual’s credit score will impact virtually every area of his or her financial life. This includes whether or not they are approved for a car loan or mortgage, what the interest rate will be on these and other types of loans, and even whether or not they are approved to lease an apartment.
One of the best ways to build and maintain a strong credit score is to pay all bills on time, says Koene. “You can order a free copy of your credit report once a year at www.annualcreditreport.comin order to monitor your credit score and correct any errors that may crop up.”
5. Equating money with happiness.In today’s advertising saturated society, it can be easy for young people to think that making a lot of money is the key to being happy in life. But Koene notes that there are plenty of very wealthy people in this country who are very unhappy — and plenty of un-wealthy people who are very happy.
“Money is only one aspect of a happy and well-rounded life,” says Koene. “I encourage young people to concentrate on activities and careers that make them happy, rather than on earning as much money as possible.”
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. Member FINRA & SIPC
Founded in 1976, David Lerner Associates is a privately-held broker/dealer with headquarters in Syosset, New York and branch offices in Westport, CT; Boca Raton, FL; Teaneck and Princeton, NJ; and White Plains, NY. For more information contact David Lerner Associates 1 877 367 5960 http://www.davidlerner.com