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5 Common Money Mistakes That Young People Make

Turning 18 is a pretty big milestone. In many ways, it means you are now an adult. It also means people expect you to start making better decisions - including how you handle money and avoiding common money mistakes. Since it’s becoming more likely for young Canadians to have part-time jobs while in high school - plus the large financial transaction many are facing with university - money management is an important topic for our country’s youth.

In fact, a study by The Boston Consulting Group showed that teens who participated in Junior Achievement Canada’s Financial Literacy Program were three times more likely to spend less than they earned, save more and borrow less - plus, 50 percent more likely to open their own company. And while Canadian teens fared better than most wealthy countries when it comes to financial savviness, there’s still a lot of young people who didn’t meet minimum financial knowledge thresholds.

There’s some truth to the saying that we can learn by knowing what not to do just as much as what to do. So, let’s discuss common money mistakes we all have made before, so the next generation can learn from us


1. Not Building Your Savings Account

When you have a job and not that many bills, it’s easy to spend money. Bagging the latest fashion or picking up the tab for your friends at dinner can make you feel great. But there’s a saying that can save you from more than just a cluttered closet or a few extra pounds around the middle: Pay yourself first.

By opening a savings account and sticking to a savings plan, not only are you giving yourself a cushion for the unexpected expenses in life, but you’re setting yourself up for a strong financial future. It’s recommended to put aside about 10 percent of each paycheck into a Tax-Free Savings Account or Youth Savings Account.

The other thing to consider when saving is what you are saving towards. A lot of young people sock money away for a particular reason, like buying a car or paying for university. And while those are responsible, encouraging financial decisions, they shouldn’t be your only reason for saving. After all, building a savings safety nest offers peace of mind that can only come from financial security.


2. Borrowing 100% of the Costs of University

There’s bad debt and then there’s good debt - and university debt is one of the good guys. But like all things, only in moderation. Just ask the 77 percent of university graduates under 40 who said they have regrets about money spent during their university days. If that doesn’t help, think about the fact that if you fall into the average category, you’ll be 30 before you pay off your university debts.

Given that the average annual cost of university before books, supplies, and travel is around $6,500 each year, financing just your tuition would leave you in a staggering amount of debt with just your undergrad costs.

One way to avoid this is to get a part-time job during school as soon as possible. If you don’t want to work and learn, others suggest you take a couple years before going to school to focus on working and saving so you can go to class with spare cash.

Whatever you do, remember that tuition and books are not the only expense you’ll have during school. Rent, groceries, car insurance, transportation costs, entertainment - basically all of the bills your parents have paid are now your responsibility. Speaking of parents...

 

3. Banking on Mom and Dad

For most of us who were lucky enough to get an allowance during their childhood, it might be a rude awakening to learn that mom and dad are no longer going to pay you to do the dishes. The new bank in town is, well, the actual bank.

Hoping your parents will continue providing financial assistance is not a financially savvy savings plan. Sooner rather than later, they’ll have to cut off the cash flow and you’ll be left wondering how they managed to pay for the day-to-day. Learning to spend, budget, save, and be frugal will go a long way in helping you build your very own bank account.


4. Going Crazy with the Credit Card

Maybe you had one of those prepaid credit cards marketed to young adults. Positioned by the credit card companies as a way to teach youth about financial responsibility, these credit cards actually encourage young people to spend.

By the time they get a real credit card that doesn’t require you to put money on to it, they have developed liberal spending habits they take with them when they use their shiny new plastic. This can be a big mistake.

Instead of using the plastic for every purchase like a growing number of Canadians, younger people should stick to cash and only use credit cards when absolutely necessary - like for an online purchase.

Remember a rule of thumb when using a credit card: Do not purchase something you otherwise would not be able to pay for in cash. 


5. Not Investing in the Long Term

When it comes to thinking long-term, sometimes young people struggle to see beyond the weekend, let alone years into the future. But during the years when you have disposable income with little to no financial responsibilities, that is the time to think about investing into your future.

Take the time to learn about aspects of investment, like asset allocation, passive investing, and compounding of returns. Consider the use of mutual funds that allow you to make small deposits over time. Look into buying stocks of your favourite brands, like Nike Inc. or Electronic Arts (EA). Make it interesting and fun - and make money while playing those video games.

If you can begin incorporating good financial practices in your younger years, it can help you avoid the pitfalls of money mistakes later in life. Save borrowing from payday loans and credit cards for the real-life emergencies and stockpile your savings for any potential expense that may come your way. For more financial education and information, check out the rest of our "Money Matters" blogs!

 

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