Managing your money may seem easy enough to do. However, the reality is that many people fail to achieve their financial goals because of improper money management in their younger years. In fact, many adults experience significant regrets about how poorly they managed their funds in their younger years. Therefore, learning about financial mistakes to avoid in your younger years can help elude their fate.
When your goal is to retire by the age of 37, you simply do not have time to play catch up. You can’t relax now and then compensate for mistakes you made early in life. Trust me, I know, I’ve been there. When you explore common financial mistakes to avoid now, you can make better money management decisions that can set you on a better path for a more secure future.
So, What Are These Financial Mistakes to Avoid?
Unfortunately, there are no do-overs in life. More unfortunately still, there are many financial mistakes to avoid in your young adult years. You only get one chance to make wise financial decisions when starting out in life. While many people make costly financial mistakes that impact their ability to retire by age 37, you can avoid making these same mistakes yourself. By doing so, you can improve your chance of retiring at a younger age.
Here are the financial mistakes to avoid I’ve come across and which I strongly advise you to steer clear of.
1. Try Not to Get a Divorce
More than half of all marriages end in divorce. Indeed, it can be impossible to determine up-front if your marriage will fail. However, you should be aware of the financial consequences of this possible outcome. The legal expenses for divorce may cost several thousand dollars or more. However, the real cost of divorce relates to dividing all of your assets up.
Yes, you read that right. When you divorce, if you didn’t get the famous prenup, all your assets are cut in half, just like that. And just like that, you’re half way back on your path to retiring by the age of 37.
You may also be required to pay alimony and child support to your ex. It can be increasingly more difficult to prepare for early retirement when you have to give half of your assets to an ex. The same goes for when you have reduced net income to make up for that financial loss.
2. Don’t Get Into Risky Habits
Your lifestyle and behaviors can cost you a fortune over the years. Everything from smoking and excessive drinking or partying to gambling and even impulse buying to keep up with the Joneses can result in a waste of money. This is money that otherwise could be invested and saved to help you reach your early retirement goal.
A better idea than to adopt these risky habits is to live a quiet, clean life on your own terms. If risky habits currently are a part of your life, make an effort to adopt a new lifestyle. Doing so can help you to save a substantial amount of money over the years.
3. Don’t Buy a House That’s Too Big
A house is a financial asset. Therefore, you may think that investing in a larger house is financially beneficial in the long run. Each mortgage payment you make may be building equity. Still, you are also paying more in interest on the debt. In addition, when you have a mortgage payment that is uncomfortably large, you are more likely to live on a tight budget. You are also increasingly likely to take on credit card debt because of a financial emergency.
There are also increased expenses associated with having a larger house, such as utilities and maintenance. These higher expenses can prevent you from saving and investing more money to prepare for early retirement. Altogether, it is best to purchase a modest-sized house that is below your means.
4. Don’t Get Into Expensive Cars
While many young adults take pride in driving a nicer, newer car or even a luxury vehicle, cars are typically depreciating assets. As you continue to pay money on your car loan, your vehicle will lose its value. To accomplish your early retirement goal, you must purchase assets rather than liabilities. Focus on finding an affordable car that accomplishes the primary purpose of getting you around town rather than on buying a car that is a status symbol.
5. Be Prepared for Medical Emergencies
In your younger years, it may seem highly unlikely that you have a medical emergency. However, illness and injury can strike at any time. Moreover, medical expenses are one of the leading causes of bankruptcy. There are two steps you should take to reduce the financial impact of medical emergencies.
First, purchase an affordable health insurance policy.
Second, ensure that you have enough money saved in your rainy day savings account to pay your health insurance deductible and co-pays as needed.
6. Diversify Your Investments
To retire at a younger age, it is necessary to create a well-diversified portfolio and to fund your accounts fully. Putting all of your eggs in one basket can be risky to do. Often, it can lead to significant financial loss. Take time to compare rates of return, tax benefits, and more for all types of investments. Then, create a strategic plan for funding a fully-diversified portfolio.
7. Have an Emergency Fund
One of the top reasons why young adults fall heavily into debt is because they run into financial emergencies. These may include car accidents, health crises, job loss, home damage, and more. While these may seemingly be unexpected, the reality is that these are all things that most people will have to deal with over the course of their lives.
Therefore, they are not unexpected emergencies at all. Instead, they are unplanned emergencies. You must have an emergency fund to prepare for these situations. Therefore, you should take steps to regularly contribute money to this account.
8. Don’t Waste Time
When looking at financial mistakes to avoid when you are young, wasting time is a significant one. Time is on your side when preparing for retirement. This means that starting early allows you to take full advantage of this benefit. For example, time works in your favor with both compounded interest and dividend re-investments. You can easily use a future value retirement calculator to review different scenarios for beginning your investment activities earlier versus later in life to see for yourself the power of time when preparing for retirement.
When you talk to your parents or older friends and relatives about finances, they likely will be ripe with regrets and offer many tips about financial mistakes to avoid in your younger years. They may tell you about how much time they spent trying to pay off debts they accrued in their young adult years or how long it took to get out from under a bad financial situation. Many will state how significantly different their lives would have been if they had just done a few things another way.
The good news is that you are young enough to learn from their mistakes, and your financial future can be different and better than their current reality. Now that you are aware of some of the top financial mistakes to avoid in your younger years, you can easily re-position your finances so that you make more informed decisions about your money.