3 Horrible Financial Mistakes You MUST Avoid - Smart Money Seed


3 Horrible Financial Mistakes You MUST Avoid

On the train from Long Island to Manhattan, May 2015. We swear we only had 1 each. We'll explain later.

Unlike the crotchety old man down the street, we truly believe in our generation's ability to succeed. Unlike the guy you graduated high school with who refuses to get a job because he doesn't want to work for "the man," we truly don't believe success will be handed to us.

The easiest way for our generation to become the most financially successful generation ever is for all of us to stop screwing up. So if you're doing any of these 3 things, you need to get your shit together, like, yesterday.

1. Not Investing for Retirement

The most powerful financial tool all of us have the opportunity to take advantage of is the power of compound returns. The best way to illustrate this is to provide an example.

Let's say you're 25 years old and your gross (pre-tax) annual income is $30,000. If you are able to save 10% of your income for retirement, you can retire at age 65 with $1,327,778 assuming a 10% annual return on your investment (which is the approximate average of the S&P 500).

$1,327,778 is a shocking number. Who wouldn't want that in their bank account, right? Well the next detail is even more shocking. Over the course of that 40 years, you invested $120,000 of your own money (3,000 per year). That means that the market and the power of compounding returns made you $1,207,778 during your working life! That is actually more than your total income during that time ($30,000 x 40 years = $1,200,000).

Just because we can't  express enough the importance of the time value of money and compound returns, check out the graph below. The blue is the money you paid into your retirement savings in this scenario. The green is the interest you make from the market. Pretty crazy, huh?

Chart and graph courtesy of MSN Money

Our point? Invest now. 

2. Not Taking Advantage of Employer 401k Matches

Many employers match employee 401k contributions dollar for dollar up to a certain amount. Most employer matches are around 3-4%, but some companies match even higher. If your employer matches your 401k contributions, you need to maximize that incentive. If your employer matches 3%, you are guaranteeing a 100% return on the first 3% you invest for retirement.

Let's get back to the analytics. Let's suppose again you are the 25 year old with the $30,000 salary. You still save 10% of your income, but in this case your employer matches the first 3% that you contribute. That increases your monthly savings from $250 to $325. That change increases your savings amount at age 65 to $1,726,111. Again, you have contributed $120,000, this time your employer has contributed $36,000, and the market has now made you $1,570,111!

3. Taking on Bad Debts

Bad debts like payday loans or past due credit cards can be catastrophic to your financial success. The interest on these types debts can range from about 17% on a decent credit card to about 400% on a payday loan. If you don't have the money for whatever it is you will use your credit card or payday loan for, then simply do not spend money on that thing. You will pay the price for that decision for years. 

We bet you could've guessed we were going to throw some more numbers at you. Let's say you have a $1,000 charge on your credit card. We won't bore you with the formulas credit card companies use to calculate minimum payments, but let's just assume you're making minimum payments (about $25) on this balance. It will take you 5 years to pay off the debt and you will end up paying $486.20 in interest! What if you have $5,000 in credit card debt and pay minimum payments? It will take you over 18 years to pay off your balance, and you'll pay $6,151.54 in interest! 

That's an enormous waste of money that you probably would've rather used on a couple nice vacations or about 12,000 Natty Lights. OR if you're too high class for Natty like we are and don't need 12,000 beers, you could get some Steel Reserves while you're on vacation!

Get It Together!

If you're committing one of these mistakes, the good news is your eyes have now been opened to the errors in your ways. It's never too late to get your act together and get your financial life back on track. So pump up those 401ks or IRAs, take advantage of your employer matches, pay off your entire credit card balance each month, and NEVER step foot into a payday loan business. Follow those rules, and you'll be well on your way to long-term financial success!

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