Most Common Money Mistakes Young People Make

When it comes to smart money management, there is no better teacher than experience. Unfortunately, this puts young people at a decided disadvantage. Many of the most common financial mistakes people make in their 20s can follow them for years — or even decades.

Young adults who sidestep these traps, however, are in the best position to become financially stable.

Let’s review some of the most common money mistakes young people make, and how to avoid them.

Mistake One: Mismanaging Student Debt

Here’s a sobering statistic: total student debt in the U.S. has spiked from $260 billion in 2004 to $1.2 trillion in 2014. This enormous increase has been driven in part by skyrocketing tuition and depressed wages for high school graduates.

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There’s nothing wrong with financing higher education. Young adults need to be cautious, however, as a student loan is one of the easiest types of debt to secure. Because federal student loans are subsidized, there are no credit requirements. It’s not uncommon for some students to exceed six figures in total debt from the age of 18 to 21. Students who fail to find employment after college — and who don’t take advantage of deferment and income-based repayment programs for federal loans — can find themselves drowning in debt and struggling to maintain good credit.

By being careful not to borrow more than you can reasonably repay, students can avoid this ugly scenario.

Mistake Two: Failing to Save Early

It’s difficult to start saving 20-percent of your income or making your maximum 401k contribution when you’re young. Passing up immediate gratification to help some version of yourself that’s still decades away is a hard sell.

Those who do start saving early, however, earn a massive financial advantage. If you save and invest just $200 per month and draw a very reasonable seven-percent average return, you’d have nearly $250,000 in 30 years. Kick your savings rate up to $100 per week and you’d have well over half a million dollars.

Most young people, however, don’t save much at all — and that’s one reason why so many older people are struggling to save enough for retirement.

Mistake Three: Misusing Credit Cards

It’s understandable why young people get into trouble with credit cards. Sudden access to large sums of money — and the lure of “buy now, pay later” — can be an awfully enticing combination.

Unfortunately, many young adults don’t bother to read the fine print, racking up extraordinarily high fees on things like cash advances. Young people also frequently fail to use credit cards in a way that protects their credit. Instead of aiming to keep balances low and available credit high, they take on unaffordable levels of debt. Late payments, additional fees, and lower credit scores soon follow.

It’s important that young adults be extremely judicious when applying for and using credit cards. By comparison shopping for the best rates and perks, you can begin a positive, lifelong relationship with one of the trickier financial products around.

The Takeaway

It’s unrealistic to expect young people to navigate the world of adult personal finance effortlessly. Minimizing common mistakes, however, is the first step toward later financial success.