Sometimes when my friends come to me for financial advice they say they are a little embarrassed to open up. They then feel like they made a stupid mistake with their money.
As the chief operations officer of a financial planning firm, I can assure you that I have heard many incredible financial stories.
Our company is focused on helping professionals in their twenties, thirties, and forties use their money as a tool to have a great life now while planning responsibly for tomorrow. Everyone we work with is really motivated to achieve great things – but that doesn’t mean they don’t stumble occasionally.
After years in the financial industry and working with people my age, I’ve kept seeing the same mistakes. Here are some of the most common ones to avoid.
1. Too much cash
If your money is kept in cash, it is safe and easily accessible. You risk practically nothing. All investments are subject to the risk of loss – which can make you wonder why you should even bother investing.
This is because you cannot make a return without taking some risk. And that’s the downside of cash: with very little risk, there is essentially no way to use that money to get a return and make more money.
Even modest returns (e.g., an average return of 4 percent on an extremely conservative, lower-risk portfolio) will help you meet your financial goals.
Cash, on the other hand, is just lying around. And the longer it is not used, the greater the likelihood that it will actually lose purchasing power due to inflation.
You should keep your emergency money in the bank where it is safe and easily accessible. You can also keep short-term savings in cash (this is money that you want to use sometime in the next five years). If you still have extra money, it makes sense to invest it instead of putting it in the bank.
2. Incorrectly assess creditworthiness
Myths about credit scores and their effects abound. If you are unsure of how your credit score is performing, your efforts to increase your score could backfire and even cost you money in the end.
The credit scores range from 300 (worst) to 850 (best). However, as long as you have a score of 740 or higher, you will likely qualify for the best interest rates a lender can offer when looking for funding. Having a credit score of 800 or higher is satisfying, but you really don’t get any more benefits than having a score of 760.
Your FICO score – the most important number used by most lenders – has several components, each weighted differently. Your payment history (regardless of whether you are paying on time and in full) and the amounts you currently owe other funders are most important.
Because of this, the most important things you can do to build and maintain good creditworthiness are:
- Make all of your credit card, loan, and other debt payments on time and pay the full amount due. Don’t build up debt or your score will drop.
- If possible, do not use more than 30 percent of your available money at once.
3. Ignoring the benefits of your own business
Changing jobs after a year or two is nowhere near as unusual or frowned upon as it used to be (and in some industries this is expected or even encouraged). Because of this, you may not be paying attention to the benefits your current business offers.
To some extent that might be reasonable; many employer-sponsored plans or benefits have a vesting schedule that requires you to complete a certain number of years of service before gaining full access to the benefit.
But just because you assume that you will no longer be with the company in a year does not mean that you can definitely continue. You don’t want to postpone contributing to a retirement plan because you think you’ll be moving to a new business in six months, only to be in the same place four years later because you never bothered to start.
Even with a vesting schedule, your contributions are always yours. So it pays to use the advantage for as long as possible – regardless of whether it takes a year or ten years.
4. Maxing out the budget
Often times, the absolute most common mistake millennials make is buying the most expensive house they can afford. This doesn’t seem like a big deal, especially if you can afford to buy it and it happens to be on the upper end of your budget.
The problem, however, is that you won’t have a lot of money to compensate for other expenses afterwards.
You should always lead your life within the scope of your financial means. However, there is a difference between living on financial limits and living under your financial means. The latter ensures that you have money left that you can use for other important purchases and goals – for example, investing in long-term assets, the family or leisure activities.
This article was translated from English by Klemens Handke. You can find the original here.