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In an ideal world, putting away a little bit of money from each paycheck and watching your savings grow would be enough to guarantee financial stability for your future. Unfortunately, today’s harsh economic climate means that this is far from reality – with the cost of living rising each year significantly, today’s young professionals are at an enormous disadvantage when it comes to personal finance compared to their forebears.
To enjoy financial freedom later in life, it’s vital to have a sound understanding of how to effectively manage your money. Here, we outline 5 common mistakes that many young couples and families make with their finances, and what you can do to avoid them.
Overreliance on Credit Cards
A credit card can feel like a blessing if you need a quick solution for unexpected costs. However, while you may have paid off your immediate expenses, the staggering interest rates and hidden fees may plunge you further into debt. If you’re in urgent need of money, a growing number of microfinance lenders are offering small, fast loans online with lower interest rates. This allows you to pay off your emergency expenses without putting yourself at increased financial risk.
Not Having a Backup Fund
Many young professionals are guilty of believing that having a reliable source of income guarantees their financial security. When considering your future, it’s always best to plan ahead, and envisage what you would do in an unforeseen situation that may threaten your financial stability. In case you become injured, unwell or lose your job unexpectedly, it’s a good idea to have a safety net upon which to fall. This may mean obtaining insurance or starting an emergency savings account with at least three months’ income set aside.
When you start earning enough to have discretionary income, it’s easy to order takeout every night and not check your bank balance as much as you should. While it’s important to treat yourself occasionally, living beyond your means adds up faster than you think. You can take control of this by reducing how much money you spend on non-essential items. This can be as simple as limiting takeaway coffee to once a week, which can save you as much as $1,000 a year.
Not Considering Retirement
Even though you may have just entered the workforce as a young professional, it’s never too early to start thinking about your retirement fund. In fact, the earlier you start investing in your fund, the more time you’ll have to make the most of compound interest. It’s all too common for people to reach retirement age only to realize that they have nowhere near enough on which to survive. Through adequate planning, you can spend your retirement years stress-free.
Failing to Plan
One of the biggest mistakes any young professional can make is being complacent about their income. While you may have enough to survive on comfortably now, it’s crucial to think about how your current financial decisions may impact you in the future. Paving the way to security requires planning, and a great way of achieving this is by setting goals. Whether they’re short-term or long-term, having targets to work towards can help you keep your spending in check and give you a sense of direction for the future.
When it comes to ensuring your financial stability, every bit you do makes a difference. Taking control of your finances now brings you one step closer to living your best life in the future.