As working professionals we must be exemplary at our jobs and diligent with our finances. Unfortunately, the later goal is easier said than done. Although we may work hard at our jobs, managing our money in the most prudent way can take extra work and have negative effects if we fail to handle it properly, especially during times of an economic recession like we have today. Here are 5 financial mistakes to avoid as a young professional:
1. Overspending. As young professionals with a decent salary, we can be very tempted to overspend. Many of us may not have children or family members who rely on our incomes, so we may purchase numerous things we may not need with our discretionary (left over) income. Whether it’s new clothes, take-out food, weekly happy hours, or frequent travel, we may find ourselves spending a lot more than we anticipated at the end of each month. Although it’s acceptable to “treat ourselves” every now and then, we must make sure that we have set a budget on how much we want to spend each month and have a reliable way to track our expenses. The less we overspend the more money we have for other priorities like saving and investing.
2. Not saving enough money. If this pandemic has taught us anything, it’s that we should all have some money saved up. We never know when something unexpected will happen and it behooves us to have money available just in case our income drops or a large expense comes our way. Although we may be tempted to simply save whatever we don’t spend from each pay period, we should instead take a more proactive approach. Consider writing down how much money you’d like to save each month, then have that money automatically deducted from your checking account into a savings account. Saving money this way will ensure you meet your savings goal.
3. Under-estimating our expenses. When I was younger and more financially immature, I seemed to always run low on funds at the end of each month. There were several times that I would hope and pray I had enough money in my checking account to cover my monthly bills. Don’t be like be, have a monthly budget and be as precise as you can when it comes to your monthly expenses. Oftentimes, we may know how much we spend on rent or electricity but we may underestimate or forget to save money for other expenses like car repairs, grocery bills, and transportation costs. Underestimating these items can give us a false sense of security and cause us to think we have more money to spend in our accounts than we actually do. Being more precise with our monthly expenses allows us to better account for how much money we can spend each month and ensures that all of our necessary expenses are covered, especially during this current pandemic where our disposable income may be different from normal.
4. Taking on too much debt. With today’s age it can be relatively easy to get access to a credit card, qualify for a car loan, or receive a student loan. Although there are many good uses of these items, we must not forget that they are still forms of debt. One of the biggest mistakes many young professionals make is taking on too much debt. We may graduate from college with tens of thousands of dollars in student loan debt. We may move to a new city and pay for expenses with a credit card. We may decide our current car is too old and opt for a lease or finance a newer ride altogether. We may even get married and decide to purchase home. All of these decisions may bring us joy but may also cause us to incur a lot of debt, which may make us financially vulnerable to changes in our income. If some unfortunate event happens and we are furloughed from our job or experience a decrease in our pay, it may be difficult for us to cover all of these debt payments. We are better protected financially when we refrain from incurring too much debt at once by vowing to pay off or pay down some of our debt before incurring more.
5. Having too much confidence in our investment abilities. As we start to mature and hang around other professionals in our work or social life, we may desire to build our net worth and start investing. Many of the advice we hear about investing requires us to pick which companies we want to invest in and purchase stock. Although there is nothing wrong with buying stocks, we must do so in a way that minimizes our risk. Unless you have a crystal ball to predict the future, it can be virtually impossible to predict which stocks will increase in value over time (which make us money) and which may decrease over time (which may lose us money). Although we can try to speculate based on news events, most of the “insider information” is known by wall street investors and active portfolio managers long before is it known by members of the public. Since we can’t guarantee that we’ll make accurate predictions regarding a stock’s future value its best to not have to choose. Many financially savvy people purchase index funds (a collection of many or all of the stocks available) since it spares us the burden of having to pick which investments will do well and which ones wont. Plus, if one company’s value goes down, we have so many other companies that can help cushion the blow and prevent us from losing too much money. Data from the past few decades show that index funds tend to outperform the majority of actively-managed funds, which virtually guarantees us a good profit on our money when we buy index funds. Try to avoid overestimating your own investment ability and consider purchasing index funds to minimize your risk.
As a young professional, which financial mistakes have you avoided and which ones have been more difficult to bypass?