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Many young adults struggle with money and don't know how to manage their finances. Building sustainable wealth is much simpler once a financial plan is created. Below are some mistakes to avoid.
1. Spending more than what you earn
One of the worst financial mistakes is spending more than you earn. This unhealthy habit can trap you in a paycheck-to-paycheck cycle, leading to debt instead of wealth. Creating a personal "balance sheet" with your income and essential expenses can give you a better view of your monthly spending and help you adjust your cash flow to save more. It's important to think twice before making any unnecessary purchases that don't bring much value to your life. Remember, small actions can make a big difference.
2. Making large and unnecessary purchases
Making large purchases can be thrilling, especially with young adults who have just become financially independent. However, think twice before making those purchases. Constantly asking yourself some key questions like:
Do I really need it?
Can I afford it?
Is it the right time to buy it?
Are there other affordable alternatives that make sense before purchasing expensive items?
Setting a spending limit for yourself (for example, a monthly limit of $200-400 ) could help you make more thoughtful decisions.
3. Having credit card debt
A credit card is a good tool to build your credit history. It helps you prepare for big future purchases for which you might need to obtain loans, such as a car or a house. However, overusing credit cards can lead to accumulating debt with high interest rates. Ideally, keep your credit card balances below 30% of your total credit limit, and remember to pay your bills on time to avoid interest.
4. Not having an emergency fund
Life is full of unexpected events, so preparing for those circumstances is essential. Putting aside a portion of your savings for an emergency fund would help you navigate things smoothly. There are no standards for how much you should save for an emergency fund, but it should range from three to six months' worth of your monthly expenses. So, if your monthly expenses run at around $5,000, having at least $15,000-$30,000 in the bank is a good starting point.
5. Thinking it is too early to save for retirement.
When you are in your 20s or 30s, you might think you are too young to start saving for retirement. However, it would never be too early to begin planning for a secure future. Taking advantage of your employer's 401k matching contribution is one of the simplest ways to start saving. This "free money" could increase significantly if you invest it thoughtfully. Moreover, saving for retirement in your 20s and 30s can allow you to retire early. Even small retirement contributions can add up over time, so it is worth prioritizing.
6. Not setting up goals for yourself
People often prioritize thing differently at various stages of their lives. Your plans may evolve over time based on your circumstances, but setting both short-term and long-term goals is key. Goal setting helps you stay on track with your progress toward your desired lifestyle and provides validation for your financial achievements.
7. Not having a financial plan.
Your achievements in the future are influenced by what is going on right now. Having a good plan is crucial to attain your desired lifestyle in the future. Things sometimes arise unexpectedly, but be flexible with your plan in these unpredictable circumstances.
To fulfill your objectives, having a plan based on what you have now and what you are working toward in the future can help you monitor your financial status to make progress. Collaborating with a financial adviser who specializes in building financial plans can provide another perspective and can help you develop a comprehensive plan for your future. A financial plan often acts as a roadmap, tracking your progress while keeping you focused.
CWM is a full financial planning and investment advisory firm guiding individuals and their families to realize and future-proof their desired financial lifestyle. You can reach us at (408)995-0915 to set up a complimentary consultation and take the first step to building your financial future.
Advisory services offered through Corinthian Wealth Management, Inc. a Registered Investment Advisor.
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