A while back we talked about the 5 big mistakes to avoid during retirement. This week we want to focus on financial mistakes to avoid when you’re younger. A lot of time younger people downplay financial decisions because “retirement is still so far away”. However, the financial decisions that we make now can have an impact for years to come.
Ignoring your Credit Score
Your credit score is never something to be taken lightly. A good credit score can save substantial sums when financing large purchases (i.e., mortgage, car, etc.), and it can take years to recover from a mistake.
Often larger purchases are postponed until later in life, along with the attention we give our credit scores. Credit scores take time to build and having a bad credit score can also cost you thousands of dollars in additional interest. For more information on credit scores read our blog post entitled “Your Credit Score Matters“.
Skipping Student Loan Payments
With the historically high amount of student loans, a lot of people are finding it increasingly difficult to afford the payments after graduation. Skipping student loan payments can have several negative consequences that could have severe long-term effects.
As debt burdens increase more people are defaulting or missing payments. These negligent acts significantly lower your credit score. If you find yourself out of work, or not able to make payments, contact your lender to look at potential payment restructuring or repayment assistance plans.
Not Saving for the Future
The earlier you can start saving for the future, the better off you will be. If you can start saving at age 25 or earlier, the magic of compounding interest will work in your favor. The more time you leave compounding interest to do the heavy lifting, the better off your retirement fund will be. Here’s more on compounding interest.
Committing to saving early (and not withdrawing it) can alleviate a lot of pressure on saving later in life. In addition, a huge bonus to starting earlier is that you can put away a modest amount while your fixed expenses are a lot lower, and end up with a sizeable retirement nest egg. Individuals starting later in life who have a similar lifestyle spending goal in retirement will have to put away a lot more, squeezing their monthly budget significantly.
Living Beyond Your Means
When we think about living within one’s means, often people think this means that they should just not spend more than they earn. Although this is true, it may still be beyond someone’s means. A better way to view things is to save first, spend later.
Truly living within your means would mean putting away money each month for the future as part of your “fixed expenses”. That is where save first, spend later comes in.
Dipping Into Savings
Your savings do best when they are left untouched. It is crucial that money put away for the future remains there. By taking out of savings, there can be significant consequences.
Not only will you compromise the effect of compounding interest (which works wonders on the amount you save), there is also potential tax consequences, and the risk of not having enough money later in life (i.e., retirement).
The tax consequences are not a guarantee but are dependent on what type of account you might be tempted to withdraw from.
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Disclaimer: This Forbes Wealth Blog is for informational purposes only and does not constitute financial, legal, or tax advice of any kind. Please consult your legal, accounting, tax, investment, banking, and life insurance professionals to get precise advice relating to your particular situation before acting upon any strategy.