Photo (cc) by CubanRefugee
If you’re just graduating, I feel for you.
The economy is still bogged down and the job market is soft — not a great time to start out in the world.
But don’t make it worse by getting your financial life off on the wrong foot and developing bad money habits. In no particular order, here is a list of money moves to avoid as you enter the real world.
1. Borrowing to buy things that lose value
Cars, furniture, appliances, tech gadgets – the value of these things is headed in one direction, and that’s down. Paying interest means getting hit twice, first by the value loss, then by finance charges.
There are purchases where borrowing is justified: a home, a business, or an education can be among them, since they at least have a chance of ultimately increasing your net worth. For pretty much everything else, the fewer borrowed bucks, the better.
2. Not taking enough risk
While gambling is a fool’s game, keeping your powder too dry isn’t smart either.
If you invest $500 a month and earn today’s insured savings rate of 0.5 percent for 30 years, you’ll amass $194,157. If you take a measured amount of risk, invest in ownership assets like stocks or real estate and as a result earn 8 percent, you’ll have $745,179.
Obviously, you shouldn’t put all your money in risky assets. But it should also be obvious that you shouldn’t put all your money in risk-free assets either.
3. Not building savings
According to a recent study by Bankrate.com, 28 percent of people have zero saved for emergencies, and another 20 percent don’t have enough saved to cover three months of expenses.
Start saving now. Calculate how much you’d need to live without income for six months, then make that sum your goal. Set up an automatic transfer into your savings account so you pay yourself first.
4. Not keeping your credit in shape
You’ve heard it all before: A low credit score means higher borrowing costs, higher insurance premiums and more difficulty renting an apartment. A bad credit history could even affect your ability to land some types of jobs.
If that hasn’t hit home yet, maybe this will: Say we both take out a 30 year mortgage. Because my credit scores are low, I’m saddled with a higher interest rate and higher payments. My monthly payment is $1,200 a month. Because your credit is stellar, you’re offered a lower rate, which means lower monthly payments: $1,000 a month.
Now, suppose you invest your extra $200 every month during that 30 years and manage to earn an average of 8 percent annually. After 30 years, we’ll both have paid-for houses, but you’ll have $300,000 I don’t.
That’s a nice chunk of change simply for showing up with a good credit score.
Monitor your credit for free by visiting AnnualCreditReport.com. If you don’t like what you see, take steps to improve it. Also, Money Talks News founder Stacy Johnson offers advice to new grads about building credit in this video.
5. Settling for more
The asking price is rarely what you have to pay when it comes to many goods and, especially, services. If you aren’t inquiring about discounts, researching coupons (or checking our deals), and haggling for the best prices, you won’t get them.
Those who ask often receive, from free hotel upgrades to lower interest rates — even cheaper doctor visits.
Remember, there are only two ways to get richer — earn more or spend less. The best way to spend less is to ask for a better deal.
6. Ignoring insurance
You have to carry it and it costs a ton, but very few people take the time to understand the insurance they’re paying for, or how they might pay less.
Understand your options, review your insurance once a year, and make sure you’re paying as little as possible with techniques like:
- Shopping around to make sure you’re getting the best rate.
- Raising your deductibles to lower your premium.
- Not over-insuring, or paying for protection you don’t need.
7. Passing up retirement plans
Not participating in your employer’s 401(k) or other retirement plan at work, especially if they offer matching money, is really dumb. Not only are you failing to save for retirement, you’re missing potential tax deductions and something rare in the financial world: free money.
Sock all the money you can into a tax-advantaged retirement plan. Take advantage of employer matching contributions and tax breaks.
8. Wasting windfalls
Here’s a mistake I’ve certainly made before. Who hasn’t? You get a big lump sum of money and you spend it all.
Many people get this opportunity every year with tax refunds, which averaged about $2,900 this year. If you get a refund, don’t waste it. Leverage it by paying down debt, increasing your productivity, or adding to your savings. Check out “7 Ways to Make Money With Your Tax Refund.”
9. Not budgeting
Not having financial goals and tracking your expenses is like driving around blindfolded, expecting to somehow arrive where you want to go.
Your goal is your destination — where you want to be. The shortest path to get there is allocating your resources with a spending plan and tracking your progress.
If you don’t have a compelling goal, make one. And if you don’t have a spending plan, make one of those, too. Setting budgets and tracking expenses used to be a time-consuming pain because you had to do it by hand. Now it’s as easy as going to a free site like Power Wallet and letting them do it for you.
10. Thinking money is happiness
Happiness comes from liking yourself, something completely unrelated to money.
When you’re on your death bed, will you be thinking about money? If so, your contribution to the gene pool was negligible. Rather than obsessing about money, think about what really makes you happy. Then make only enough money to take part in those activities. Making more is a waste of the only nonrenewable resource you have: your time on the planet.
One more bonus bad move: not sharing good information with others who might appreciate it! If you liked what you read here, share it with someone you know. It’s as easy as hitting the “Share” link below. Then add to our list, confess your money sins, or otherwise participate on our Facebook page.