Painful Money Decisions Young People Need to Avoid
Have you ever made a decision that you not only regret immediately after but that will also haunt you for the rest of your life? When it comes to financial planning decisions, the choices that you make now will most likely stay with you forever.
There are countless numbers of these decisions that you will face through life and many bad ones can be good learning experiences but I still think that it’s better to avoid making some of the bad ones altogether if you can. I’ve decided to focus on a few bad decisions that are most commonly made by younger people (ages 20-45) in the hopes that someone considering one of these steps will reconsider:
1) Taking out a larger student loan than you need: Many university students are surprised to find out just how much money they can take out in loans while they’re in school. The money not only meets their basic expenses for rent, food, tuition and textbooks but leaves enough left over to avoid picking up a part time job and maybe even a week in Mexico for spring break. Sure you expect to have a great job once you graduate and can pay the loans back but that debt load will make you start saving for your own retirement later and put you further behind in life. It’s okay to accept only what you need and not take the full amount of loans offered to you.
2) Paying only the minimum due on a credit card: By making only the minimum payment on a credit card, almost the entire amount you pay goes towards interest charges and the balance is reduced by only a tiny fraction. Let’s consider a $10,000 credit card balance with a 25% interest rate – a 3% minimum payment would mean you only need to pay $300/month against it. However, to have it fully paid off, you would continue to pay for almost 36 years and pay a total of $22,211 of interest on top of the $10,000 of capital. By bumping your payment to $400/month, you’d have the debt cleared in 3 years (vs 36) and pay a total of $4,273 in interest (vs $22,211).
3) Spending money that you don’t have: This ties in with the credit card mistake above but you really need to consider purchasing anything that you don’t have the money for now. Building up debt is a slippery slope and something that can take many years to recover from. Considering a vacation? Determine how much it will cost and start saving money each week or month now to have enough set aside to fully pay for it before you go. It can be tempting to just put it on your credit card now and pay for it when you get home but life will no doubt get in the way and the disposable income you planned to use to pay this debt off may be needed for other reasons. This is a tough lesson for many people to learn but the sooner you do the better off you will be.
4) Borrowing from your investment account: University is expensive and saving up enough for a downpayment on a home is tough so there are certainly times where it makes sense to use the RRSP “Home Buyers Plan” or “Lifelong Learning Plan” loan program. For pretty much everything else, leave your investments alone. The first time you dip in there might seem innocent enough and it’s only a small amount so you assure yourself that it won’t affect your retirement too much but I promise this will just be the start. Repeated trips to your investment savings will leave you back to square one and starting to save all over again, with less time to do it. When considering pulling some money from your retirement savings, just don’t.
When it comes to making decisions with your own money, live within your means, create a budget and stick to it. Those are decisions that I promise you won’t regret later.