This post was written by a guest contributor to the Meratas blog.
Young professionals often find that they have fewer financial responsibilities. They may not have children yet and the money they’re earning can potentially tempt them away from spending and into a life of luxurious purchases. In this guide, we’re exploring the top budgeting mistakes young professionals make to help you avoid making the same ones. Your early working life is a chance to set yourself up for the future, but without a little consideration, it is easy to fall into these traps and put yourself in a worse financial position as a result.
Many young professionals have had years of having very little money. Perhaps they’ve been used to having to tighten the purse strings all through university. So, when the time comes that a larger amount of money is being transferred into their bank account, the temptation can be to spend it.
Prioritizing the things to spend money on is vital, and there is a balance to be struck between enjoying life in the short term and planning for the future. Some young people get into the habit of spending beyond their means, and this can ultimately lead to debt problems, too.
We’re not suggesting that young people shouldn’t be able to spend some money on themselves, but the temptation to buy the wrong things, and to spend their salary on nights out or designer clothes can lead to financial woes and regret in the future.
Living Paycheck to Paycheck
It’s amazing how many people live like this. Unless you really have no other option, it is not a great idea to spend all of what comes in every month. This will mean that if an emergency comes up, you have no way to deal with it other than to borrow money. Building up an emergency fund or a reserve ensures that you don’t have to constantly live in this way, hoping that your paycheck covers everything for that month.
Not Getting Insurance
You’re young and healthy, why would you need insurance?
Too many people take this attitude. It’s easy to be complacent about your insurance when you’re young, especially if you’ve never had any loss as a result of not being insured. You shouldn’t fall into this trap.
In an ideal world, you will have a level of health insurance coverage through your job, but this isn’t always the case. A lot of young professionals go down the route of starting a business rather than working for someone else, so you might not automatically get covered. Similarly, you should make sure you get a good home insurance policy, as you don’t want to be liable for the costs if there is an accident within your home. Something like a burst pipe can come from nowhere and be devastating to your financial situation.
Staying in a Job With No Prospects
If you’re young, you’re probably at the start of a long career. If you’re ambitious, you will want that career to bring you a fair amount of success, and without prospects to advance within your current job then you might be doing yourself a disservice financially.
Even if you’re doing a job you enjoy, or one that pays well, ask yourself if it has any long-term prospects. Can you see yourself advancing within the company? If not, it might be time to try and plan an escape route and a way to get onto the next rung of the ladder. If you stay in a job that doesn't have prospects, you should definitely consider planning something to advance your future, such as starting a business in the future.
Not Sticking to a “Going Out” Budget
Some young professionals earn a decent salary, but get to the end of the month and wonder where their money went. Budgeting is absolutely crucial if you are one of the young people who find themselves struggling in spite of being happy with what they earn. We’re not saying that you shouldn’t be able to go out and have a social life, but there are definitely ways of doing this without putting yourself in a worse position financially.
If you actually take the time to plot out what you are spending money on each month, you might be shocked. Perhaps you’re spending hundreds of dollars on your daily coffee, or on eating out? These things can quickly start to eat away at the money you’re bringing in.
The way to save money on this? It could be as simple as swapping nights out for nights in. You can still have a social life and spend time with your friends, but by doing it in your own home you could be saving a fortune.
Borrowing Money When You Don’t Need To
We wouldn’t go so far as to say that all borrowing is bad. In fact, most of us need to borrow money at some point in life in order to advance. Think about how many people get a mortgage as a way to own a home. When you compare this to the cost of renting you might even save money by doing so.
Some young professionals take the approach of dealing with things later when it comes to finances. You might rely on a future promotion to try to improve your financial situation and pay off the money you’ve borrowed, but what if that never happens?
While it is definitely understandable to borrow money for some purposes, and some of us don’t end up with a choice in the matter, there are times when borrowing shouldn’t really be a consideration. A lot of young professionals are happy to borrow money or pay on installment plans for luxury purchases. This is not a wise move, financially speaking.
Trying to Compete With Peers
Peer pressure doesn’t just occur among young professionals. There are always examples of people trying to keep up with one another financially. Perhaps someone you know has bought a nicer car than you, or they have moved into a bigger place. It’s easy to feel like you need to keep up with them when actually, the best thing you can do is to wait until you are ready.
A car is still a car, whether it costs $2,000 or $20,000. Sure, you need something reliable, but luxury purchases often come from a place of wanting to compete with peers, and this is a budgeting mistake that so many people make.
Not Setting Money Aside for Investments
Within your monthly budget, you should put money aside to invest. In the modern age, it is easier than ever to invest. We’re not saying you’re going to become the next Warren Buffett, but there are still plenty of opportunities to grow your money. The best time to start is when you’re making money but don’t have too many important obligations. This is often the exact description that young professionals fall under.
The earlier you invest, the more opportunity you have for your investments to grow in the future. The beauty of compound interest means that a relatively small investment can grow to a significant sum of money, which can help with your retirement or other needs in the future.
Prioritizing Vehicles (and other Depreciating Assets)
We’ve already briefly mentioned cars and the fact that they don’t usually make a wise investment. It’s nothing against nice vehicles, but it is definitely worth considering whether a car or another depreciating asset, is a good use of your money. Spending $5,000 on a TV that will probably be worth nothing in a few year's time, is another example. Putting this same money into property or other wiser investments can be a better practice in the long run.
Once again, you have to choose the right level of balance. Do you want short-term luxury or long-term security? If you can delay short-term gratification, you’ll often end up in a better place in the long run.
Not Setting Financial Goals
Where do you want to be in 10 or 20 years’ time? What are your own personal finance goals? This will be different for everyone, but when it comes to budgeting, knowing where you want to be is a huge part of the process. It gives you something to aim for. How much money do you need to set aside to be able to afford that big house move you’re dreaming of? How much do you need to save to take a year off and go traveling? Maybe your dream is to pay off your mortgage by the age of 40. There are so many different financial goals, and the best time to set them for yourself is while you are still young and you have plenty of time to do something about it. Even if you don’t hit your goals quickly, you know what you are working towards and avoid the prospect of floundering or wasting your money on things you don’t need or that don’t align with your goals.
Budgeting is one of the most crucial skills you can have in your life. It may not be one of the most exciting, and the idea of sitting down to work out what you can afford to spend each week is not particularly thrilling. However, it can put you in far better financial stead for the future. It’s also easier than ever, with specific budgeting apps and even bank account features on mobile banking able to do a lot of the work for you.
This post was written by a guest contributor to the Meratas blog and not a member of the Meratas content team. The views of the guest author may not reflect the views or opinions of Meratas. Meratas Inc. makes no warranties, express or implied, or representations as to the accuracy of content contained herein. Meratas Inc. assumes no liability or responsibility for any error or omissions in the information contained herein or the operation or use of these materials.