The first few years of living alone can be pretty tight financially, since most young renters have a lower income and more expenses than they’re used to. For that reason, it can be hard to pay off student loans and credit card debt, take care of bills, save money, invest, and still have enough leftover for a night out with friends.
As you get a handle on your expenses and start earning a little more, it’s important to begin taking a serious interest in your finances, keeping track of where your money is going and avoiding some financial blunders that many people frequently make.
Here are some of the most common money blunders and how you can avoid making them:
The problem with knowing how to solve the problem of overspending is that everyone does it for different reasons. I, for one, am guilty of buying a pricey handbag right after payday when it feels like I have all the money in the world. Others use spending as a form of therapy, underestimate their monthly bills or simply don’t keep track of day-to-day expenses.
No matter how you’re overspending, the best way to stop is to create a budget and start keeping track of where all of your money is going. Financial planners frequently recommend the 50-20-30 rule, which breaks your expenses down into fixed, goals and flexible.
The rule is that 50% of your income should go to fixed costs, such as rent, bills, groceries, etc., 20% should go toward retirement, paying debt and building a savings, and the remaining 30% is flexible.
If you want to take it a step further, break down your flexible spending into categories. Allocate for your daily Starbucks run, your weekly brunch or whatever else you may be spending money on.
2. Paying the Minimum
One of the most common financial blunders people make is taking too long to pay off debt. If you put off taking care of your loans or only make a minimum payment on your credit card each month, you could find yourself paying an exorbitant amount of interest– sometimes even thousands of dollars.
You can avoid losing some of that money by coming up with a plan for managing your debts. Consider options like consolidating loans or cutting back on spending in one area in order to pay off more each month.
For student loans, think about looking for aggressive repayment programs rather than graduated plans, which are much more conservative.
3. Ignoring Far-Off Retirement
I’m lucky my parents drove the importance of planning for retirement into my head, because if they hadn’t, I wouldn’t have even thought about it when I first moved out.
For those with entry-level salaries, it can be easy to put off saving for retirement, but starting at a young age is absolutely vital because each year you wait means missing out on putting thousands of dollars away (and the compounding interest that comes with it).
If you work at a company that offers a 401(k), get enrolled in it as soon as possible. Even if you don’t expect to be there for long, the plans are typically very easy to rollover into your next job. If you aren’t eligible for a 401(k) at the moment, consider seeing a financial planner to talk about starting an individual retirement account that you can roll into a 401(k) when the time comes.
4. Being a Picky or Apathetic Grocery Shopper
People can waste a lot of money by being brand loyal when it doesn’t really matter or by missing out on money-saving deals offered by their local stores. The first thing you can do to start saving on groceries is to check if your store has a membership card. Large chains frequently offer free memberships that come with coupons or deals.
Next, do a bit of research. While you may prefer a certain brand of pasta, canned vegetables, medication or anything else, the inexpensive store brand is often the same thing in different packaging, which can save you a few dollars each time you go shopping.
5. Not Saving
Living paycheck to paycheck is sometimes necessary, but not having any savings at all can be financially dangerous. The minute an emergency expense pops up, you may find yourself in even more debt or unable to pay your bills.
Sometimes it can feel like a toss-up between what to do first: save money or pay off debt. If you don’t have any savings, though, it’s important to take a year or so to build up at least $1,000, even if it means cutting back a bit on debt payments.
6. Not Knowing Your Credit Score
As far as money blunders go, this one is a little less clear. You may not realize it, but having a good credit score can really impact how much you’re spending in the long run. Better credit scores often mean paying less for insurance, loans, mortgages, and more.
This is another reason to create a plan for paying off debt. Making sure payments are on time and more than the minimum each month is the most reliable way to get your score up quickly.
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