Starting Out
Four Financial Rookie Mistakes
When striking out on your own, avoid these common money gaffes.
By Erin Burt, Contributing Editor, Kiplinger.com
June 25, 2009
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When you're starting out, you may not make the smartest choices with your money because you simply don't know better.
Wallowing in ignorance can be costly. But learning to manage your money well will pay dividends for the rest of your life. Wise up by avoiding these four common financial gaffes:
1. Procrastinating. Don't be a slacker. In school, there may have been extra credit to make up for laziness, but you'll get no such break in the real world. Stop the procrastination habit now.
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Putting off the task of learning to manage your money carries costly consequences.
Fail to start investing soon and you'll miss out on years of compound interest. (Get started!)
Don't keep a budget and you could sacrifice control of your spending. (Get started!)
Buy now with the intent to pay off later and you'll dig a debt hole that’s tough to climb out of. (Get started!)
Pay your bills late and you could damage your credit score. (Get started!)
Put off saving money in a rainy day fund and you could be caught unprepared in a personal emergency. (Get started!)
See our checklists of what you should aim to accomplish in your twenties and thirties.
2. Not diversifying. As a college student, in 1999 I started managing my own investments. Despite pressure from my young-adult friends and family to invest in the tech boom, I timidly divided my money among different types of mutual funds -- including a bond fund.
I didn't know much about investing at the time, and I endured much ribbing over my "ignorance" -- my friends compared my investing style to that of a 90-year-old woman. But I didn't feel comfortable putting all my eggs into one basket, even if it was a "sure thing." I admitted I was chicken -- and everyone took great pleasure in agreeing.
Turns out I wasn't chicken -- I was smart. Within months the tech bubble burst, taking the market down with it. Some of my friends and family lost as much as 60% of their money. My conservative investments took a relatively tiny dip and soon recovered. No, I didn't have some mystical foresight of what was soon to come. I had a gut feeling that spreading out my risk was the road to long-term success. Who has the last laugh now?
Diversifying can help you avoid chasing the latest fad and overcome financial peer pressure. See Diversify Your Investments Instantly to learn more.
3. Paying too much in taxes. If you're not investing in a Roth IRA or 401(k) -- or both -- you are paying Uncle Sam too much. The money you put in a Roth IRA, for instance, grows absolutely tax-free. You don’t have to pay a dime on any cash you withdraw in retirement. A 401(k), offered through many workplaces, is another sweet deal. You make contributions to this retirement account before taxes, reducing the amount of income Uncle Sam can get his hands on. You don't pay taxes on earnings now -- you pay later when you withdraw your 401(k) money in retirement. (Your employer may offer a match on your 401(k) contributions -- that's free money. Not taking advantage of that would be another big rookie mistake.)
The idea of saving on your taxes may seem a tad obscure, but it really can pay off big. Say a 25-year-old contributes $5,000 each year for 40 years to an investment account, making an average annual return of 8%. If she used a taxable account, she'd have more than one-fourth less money than if she'd gone with the Roth. (Use this calculator to see how far your savings can take you. Enter "0" in the tax-rate boxes to simulate the tax-exempt status of a Roth IRA.)
And speaking of taxes, did you get a big refund for 2008? That means you let the government take too much money from your paycheck all year long.
When you start a job, you fill out Form W-4, which tells the government how much tax to withhold from your pay. You can file a new W-4 with your employer at any time to adjust that withholding and put your refund money back in your pocket throughout the year. Use our easy calculator for help filling out the form and to find out how much money you can keep each month.
4. Going into debt. You're probably not going to inhabit the corner office at work, drive a fancy car or have a house full of nice things when you're starting out -- at least not without going into debt to pull off the charade. Too many young adults are content to spend their lives in bondage because they get antsy to live a better lifestyle. Repeat after me: Debt is not a way of life!
When you're in debt, you limit your options, and you have less control over your money and your future. You're forced to fork over interest to the bank or credit-card company instead of investing the money for your future. (See Young and Restless for Success for help overcoming feelings of financial jealousy).
Ideally, you should only incur debt for things that appreciate in value, such as a home or an education. And even then, you should pay off your obligations as soon as you can. See When is it Worth Going Into Debt? to learn more.
Reader Comments (8)
Posted by: MG at 06/25/2009 09:09:26 AM
It should have been 5 Rookie Mistakes. 5. Buying mutual funds. You are giving your money away.
Posted by: Limoman at 06/25/2009 10:09:44 AM
Well, All Good advice.. Things that SHOULD be told by parents to their kids when they are in their Senior Yr of HS and every Yr. thereafter..Unfortunately, That is not the case for the vast majority and even College doesn't tell them this kind of information.. Unless you take a specific course for it..But, If you want our economy to Grow? We best Not tell them to save much and Spend More..That is where The Home comes first and Buy American comes 2nd..it will be added to my Course I give to my employees and others...Tip: You don't need a New car every couple of yrs...We have over 400,000 miles on our vehicles... B4 replacing them..All Ford/Lincolns...costing an ave of $1,500/yr ( $125/mo ) in Maintenance after they hit 50,000 miles.
Posted by: Nathan at 06/26/2009 11:12:21 AM
Homes appreciate in value? I believed that when I bought my first home at 24 in 2006. Now I have a severely devalued "asset" and a much greater liability in my loan. Beware of conventional wisdom.
Posted by: monkeyfurball at 06/27/2009 12:49:04 AM
Good advice. Living that way made me a multimillionaire. I grew up on welfare.
Posted by: Lee at 06/27/2009 01:09:16 AM
Very sage advice. These things seem obvious to us older ones who learned the hard way by making the mistakes. So, young ones reading this, take the advice and heed it!
Posted by: David Gardiner at 06/27/2009 11:57:08 AM
My advice to anyone who can do it is to pull there money out of their 401k and put it into a Self administered IRA. After doing this, hire a money Manager with a track record of having lost minimal cash during the last 3 bear Markets. No matter what Wall Street tells you, the amateur Investors with Mutual funds tend to get destroyed every 5 or 10 years and lose 50% of their money.
Posted by: Joe at 08/01/2009 02:45:31 PM
Who in the world earns 8 percent return for the entire length of the investment time? I always see 8 percent advertised, this is a unrealistic figure used everywhere. In this economy (any) percent return would be great, yet over and over 8 percent is what everyone always uses to caculate return. This is HOGWASH.
Posted by: Limoman at 12/03/2009 06:09:59 PM
Good Advice but? "Say a 25-year-old contributes $5,000 each year for 40 years to an investment account, making an average annual return of 8%." Now, unless you some Wiz kid with a Masters, you're not going to be able to Afford Saving no $5k yr at age 35, let alone 25 for most kids.. They have student Loans to A ton of other Bills and are lucky to be making $30-$40k Net income a Yr.. Add marriage? Lucky to be able to Hide $2,000 Yr.. and At $2k yr for the 1st 10 yrs? Is going to be Chump change, when by qage 35 making twice as much and getting twice as much in Benfits and Penions and Matching programs thru your career.. and don't forget the X factor? 55% of Marriages end up where? And where does over 50% of that Savings go? Into the former Wife's pocket and what does she do with it? Blow it and just gets married to another Guy to take and live off his $.. Thus why add Tip # 11.. Get a PRE-NUP..! Just ask Paul McCartney.! And then Ask Tiger Woods if a Pre Nup is worth it or not? Otherwise, pretty good basic advice..