Being out of school and off the leash can be exhilarating. You might have your first real job and, with it, your first real paycheck. In the excitement of hitting the town every night or shopping for your first apartment, all that money can quickly evaporate, leaving you stranded until the next payday.
Learning to balance competing desires with a laundry list of financial obligations and responsibilities is a fundamental money lesson that everyone has to learn. Money mistakes happen throughout life, but the sooner you get the basics down, the better off you'll be. Avoiding these five bad habits early can help you better enjoy financial success before you know it.
|Mistake #1:||Spending every penny|
Here's the secret to achieving most financial goals: saving money. But you can't save if you fritter away everything you earn.
Use your dreams as motivation for some of the scrimping that lies ahead. For instance, if saving for a home is high on your list, that goal should get priority when it comes to your disposable income.
You probably have more opportunities to cut back than you realize. For example, instead of splurging on lunch at work because you have a few extra bucks, bring a sandwich from home and save the difference.
In order to make this work, you have to know how much you earn and how much you spend. Don't get nervous: Meticulous budgeting may not be necessary. Fidelity developed a 50/15/5 rule of thumb that can be used as a starting point. Consider the following when thinking about saving and budgeting:
- No more than half of an investors take-home pay, 50%, should go to essential expenses, including housing, food, utilities, and other regular obligations.
- 15% of pretax income should go to retirement savings—including the company match.
- 5% of take-home pay should go to short-term savings.
- Whatever is left is spent however the investor chooses.
Read Viewpoints: “50/15/5: a saving and spending rule of thumb.”
|Mistake #2:||Spending too much on housing|
It’s easy to spend too much on housing—especially if you live in a big city. According to one longstanding rule of thumb, you shouldn’t spend more than 30% of your pretax income on housing. That’s not a bad start, but the 30% figure may or may not work for you.
The amount you decide to spend on housing depends on your personal financial situation and the things you want to do with your money. For instance, many young people have high debt burdens from student loans that eat up much of their take-home pay. The class of 2015 graduated with a record level of student loan debt, an average of $35,051.1
Add in the still-recovering job market and the result is that many young adults are still living with their parents. More than one in four young people, not including 18- to 24-year-olds attending college full time, lived with their parents in 2015— and nearly half of millennials not enrolled in college lived with a roommate last year.2
Choosing to live with parents or roommates is a great strategy that can help your finances in the long run. Once you're ready to live on your own, be sure that your housing costs don't jeopardize your long-term goals.
|Mistake #3:||Carrying a balance or running up credit cards|
It is all too easy to build up a big pile of credit card debt. A dinner here, a shopping trip there, and before you know it, the minimum payment on credit card balances takes a significant chunk of your paycheck. Then the interest charges add up, further sapping your ability to save toward your goals.
Bypass that sad scenario by never charging more than can be paid off at the end of the month. "The best way to use credit cards is to make timely payments, and don't carry a balance from month to month," says John Colantino, CFP, a vice president with Fidelity's Strategic Advisers, Inc.
If you find yourself relying on credit cards for essentials or to cover unexpected expenses on a regular basis, it's time to review your spending and beef up your emergency fund. If you don't have an emergency fund, that just became one of your highest financial priorities. Seriously, it's really important.
Back to credit cards: "If you do have a balance, try to negotiate a lower interest rate," says Colantino. Card issuers are often willing to lower your interest rate if you have a history of on-time payments, and some issuers even offer to waive late payment fees once or twice a year. But they won't do it if you don't ask.
|Mistake #4:||Not saving for retirement|
Putting off saving for your future is a common problem. It is so very far away, and there is so much to spend money on now. We tend to place a higher value on short-term than long-term benefits, even when we know the long term is more important.
Another obstacle is lack of money. Many young adults feel like they can’t save enough to make a difference. But saving even a little bit matters, especially early in your career. That’s because time is on your side. You have plenty of years for the power of compounding to work for you.
Here's what that means: Money you invest can earn more money, and over time those earnings can generate earnings of their own. The result is that the earlier you start saving, the less you have to save.
Think about saving at least 15% of your income each year for retirement in a tax-advantaged account such as an IRA or 401(k). If you can’t get there right away, that is ok. You have the option to increase your amount annually if you can afford to do that until you reach 15%. Most people can find some extra to save if they just pay attention to their spending.
If you're lucky enough to have a 401(k) and get a matching contribution from your employer, contribute enough to at least capture the entire match—otherwise you're basically foregoing a part of your compensation. You wouldn't turn down part of your paycheck, so don't leave matching retirement account contributions on the table.
Read Viewpoints: “How much should I save each year?”
|Mistake #5:||Being too conservative|
Many young investors are overly cautious—maybe because they first became aware of stocks when the market tanked in 2008, or because they don’t have a lot of money and are afraid of losing it.
An overly conservative approach to investing could mean skimping on your allocation to stocks, which tend to be more volatile than bonds. But stocks also tend to outperform bonds over the long run—by a lot.
Without exposure to stocks, you will likely need to save far more money to reach your long-term goals, leaving less room in your budget for anything else you want to accomplish.
While stocks have historically offered the opportunity to get the highest return of the three asset classes, that doesn't necessarily mean you should invest in only stocks. Holding a diversified mix of stocks, bonds, and cash could reduce the level of risk in your portfolio and potentially boost returns for that level of risk.
Just remember: If you’re saving for retirement, you probably won’t touch your money for 40 or 50 years, so what happens in the market this month or this year is much less important than what’s likely to happen over the coming decades.
Read Viewpoints: “Three reasons to think about stocks.”
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917