With the lack of financial education provided by our schools, many young Americans are graduating high school while still being financially illiterate. This is a true tragedy within our American society. How can anyone start to build wealth this way? On top of that, many young people make horrible financial mistakes. In today’s article, I am going to be going over some of these mistakes and show you how to avoid them.
1.Misusing a loan
It’s easy for people to think of a loan as “free money” but they couldn’t be further from the truth. Loans are, in fact, large sums of money we pay to get our hands on. Our payments are in the form of interest. While an inaccurate way of looking at financing is at the heart of loan misuse, the real risk is inadvertently committing fraud due to misunderstanding how loans work. Consider, for instance, how online applications for business loans make a point to have the applicant describe the intended purpose of the loan. This helps to prevent someone from borrowing money meant to improve a business and using it to pay for personal expenses instead. However, when it comes to personal loans, whether or not the borrower uses them for the right reasons is up to them. It’s therefore crucial to know how to effectively use loans versus using them for all the wrong reasons.
- Having too much in savings
Don’t get me wrong, there is nothing wrong with saving money. In fact, it is a very important financial skill that everyone must learn. However, there is a point of diminishing marginal returns when it comes to savings. If you have saved up $100,000 in cash over a short period of time, that is a great thing! However, be wary of inflation eating away at your money. Inflation is on average 2.5% every year. When your money is sitting in a bank account, you are actually losing money because the amount your bank is paying you isn’t enough to cover the interest. This is why you must invest most of that money. I would recommend putting it in a Roth IRA so that it grows tax-free over the years, allowing it to compound and giving you a large nest egg when retirement rolls around.
- Buying a house at the wrong time
I know that this point is very controversial but listen to me on this. For most people, they view their house as an investment when it really isn’t. In fact, you pay it every month rather than it pays you. Throughout history, the average home in America has increased 1% in value every year adjusted for inflation. How is that a great place to store money? The opportunity cost of the equity in your home is so ridiculous. You could be leveraging that money to create more money but instead, it’s sitting in a home that isn’t providing cash flow. What I would do is buy a home and make it a cash flow property. For example, if you have a house with four rooms, rent the other three out to other people. This way, they are paying down the mortgage and providing recurring cash flow rather than you. You could also put your money into rental properties.
- Going to an expensive college
The student loan crisis is absolutely killing so many Americans. The average college student owes $37,000 in student loan debt. Some of these kids coming out of school can’t even get a job or they are underemployed. Even worse, some students go to private schools that cost well over $20k a year to attend. Unless you have scholarships or other forms of financial aid that will cover a majority of these costs, don’t go! Instead, I would advise going to a local community college for two years and then transfer to the more affordable four-year public university within your state. There is absolutely no need to overpay for the same education. This is one of the worst financial mistakes I see many friends make.