Is there anything more exciting than moving out on your own? For the first time, you get to live the way you want to, not according to anyone else’s wishes. Unfortunately, some young adults get caught up in the excitement of independence and wind up in a financial bind. If you’re not prepared for all the responsibilities of adulthood, you could miss something important and create financial problems. Learn about five of the most common money mistakes that young adults often make.
1. Overspending on Housing
A good rule of thumb is to spend less than 30 percent of your income on rent. This is tough to do when you’re working in a low-paying job. But if you rent a place you can’t comfortably afford, you’ll regret it. With rent taking up all of your income, you’ll be eating Ramen and staying in instead of enjoying your young adulthood. So shop around for affordable housing options. And consider cost-saving options .
Are you considering renting? If one-bedroom apartments are out of your budget, look for roommates. It’s cheaper to split a larger place than it is to live on your own. As a bonus, you’ll have roommates to share the cost of utilities and internet.
On the other hand, you might be looking to buy a house. If this is the case, you will need to determine how much house you can afford. Consider down payment, mortgage, and property taxes. For example, if you put down a five percent down payment, interest rates and monthly mortgage payments will be high. To avoid overspending and get better rates, put down at least a 20 percent down payment so that you can avoid paying for private mortgage insurance. If money is tight, but your heart is set on buying a house, you still have options. Try to save as much as you can now, or draw from your IRA or 401(k) to make a higher down payment and score better interest rates.
2. Paying Bills Late
Missing a bill is expensive. In addition to late fees, you could find yourself facing service fees for utilities that get turned off, eviction notice for unpaid rent, or even foreclosure for not paying your home ownership bills. Unpaid bills hurt you in the long-term, too. Late payments lower your credit score, making it harder to rent or buy in the future. If you have a history of evictions, it could be nearly impossible to find a place to live. Set calendar alerts, or use auto-draft to avoid late payments (just make sure there’s enough money in your bank account!)
3. Not Buying Insurance
Health insurance, life insurance, car insurance, renter’s insurance, house insurance — are these really necessary, or are insurance companies just out for your cash? It’s tempting to skip insurance when you don’t see an immediate benefit. However, you’ll be glad you have insurance in case of unpredictable circumstances. Without insurance, getting in a car accident could cause you to lose your license, and going to the hospital is likely to end in a bankrupting bill (you can stay on your parent’s health insurance until you’re 26, but after that, you’ll need to buy a policy of your own.)
Renter’s insurance is cheap enough that it’s worth having, even if you think you don’t have much to insure. Renter’s insurance covers your stuff if it’s damaged by fire, water, theft, or vandalism, and even protects you if someone gets injured in your home. If you plan to buy, homeowner's insurance companies will work with you on pricing if you bundle together your home and auto insurance. See Bankrate's guide on insurance.
4. Spending Every Cent You Make
When you’re making real money for the first time, it’s easy to go overboard buying everything you’ve long wanted but could never afford. But if you’re spending money faster than you’re earning it, you won’t have any to spare if you get sick, your car breaks down, or you lose your job. Without cash to spend, you could end up taking on risky debt from high-interest credit cards or payday loans.
5. Forgetting to save
Before you pay your bills, make sure to pay yourself. Make room in your budget for an emergency savings fund. When you’re young and single, your emergency fund doesn’t need to be huge. Having enough money to cover three months of expenses is plenty for most childless 20-somethings.
Making good financial choices is the best thing you can do to secure your independent future. As you prepare to move out on your own, create a budget, and plan ahead for financial challenges. With smart decision making, you can launch your adulthood on solid financial footing.