One of the major flaws with the current education system is that more often than not you come out the other end of it knowing how to make a mean diorama but have absolutely no idea what hell compound interest is or how powerful it can be.
As a result, a lot of young Australians get caught out making mistakes with their money that are easily avoidable but can mean they end up living out their retirement in the back of 1989 Mitsubishi Magna instead of in a private bungalow on Santorini, like you stated in your grade six time capsule.
The key to dodging these money blunders on the road to riches is knowing which potholes to avoid. Below are five easy mistakes young Australians make with their money that can come back to bite them in the wallet later in life.
1. Borrowing money to pay for a wedding
The average Australian wedding costs upwards of $30,000 which, put in young person currency, is a 2017 Subaru Forester. This makes your big day one of the single greatest expenses of your lifetime and though you want it seared in your memory as the best day of your life, you could spend the rest of it paying it off if you’re not careful.
Traditionally, weddings were paid for by the couple’s parents, however growing number of betrothed adults are opting to foot the bill themselves. What a lot of these strong independent young men and women don’t realise is that while their parents may be able to afford Kardashian weddings, they can’t. But they have them anyway because they feel obliged by ‘tradition’.
At the end of the day, a ritzy wedding won’t bring you any financial return, and neither will a Subaru Forester, but at least one of them can get you to Woolies at midnight for a late-night Maxibon.
2. Getting excited about a new car
For a lot of Australians, finally upgrading to a car that’s younger than you is a right of passage once you achieve financial independence. Unfortunately, a lot of people fail to understand just how many costs are associated with buying and owning a vehicle, let alone the fact that as soon as you turn the engine on, you’re losing money.
Before you can even start brainstorming ideas for your custom plates, you need to sort out financing. This is where a lot of people lose out on thousands by taking a loan from the dealer out of convenience, rather than at the bank where a few extra hours of your time can save you a bag of money.
However, none of that sweet time matters if you don’t properly insure your vehicle. If the worst case scenario occurs, you could write off your new car within the first month and still be paying it off five years later while you’re commuting to work on a Razor scooter.
3. Failing to budget
A common financial mistake among young Australians is slipping into a full-time job and automatically assuming you’re dripping in diamonds.
In reality, the average starting salary for a uni graduate today is somewhere around $54,000. But once you subtract roughly $9,000 in tax, $22,000 in rent and utilities, and $5,000 in general living expenses, then what you’re left with is less than $350 a week to play with, a.k.a. a very small diamond. But if you’ve just graduated uni, then you’re probably not looking to invest your Long Island Iced Tea money.
However, if your salary is somewhere around $70,000 a year, it probably means you’re earning more than you need to live on and that you also no doubt have some key financial goals in mind, like buying a house, or retiring to a nice Greek island in your sixties. Here’s where putting together a good budget is crucial (or you can start squeezing an air mattress into the back of your Magna).
4. Getting credit happy
Every second Instagram bio these days will tell you that, “when the going gets tough, the tough go shopping”, but what they won’t add is that when the tough realise they spent their twenties racking up a shocking credit rating, their quality of life gets packing.
One messy situation that a lot young Australians hurl themselves into is treating credit cards like free money when they bag their first full-time job. What can begin as innocent weekly retail therapy can often be a slippery slope to expensive psychotherapy if you don’t read the fine print.
While ‘credit’ can mean that today you could buy twenty pairs of Nike Flyknits even though right now you only have enough money in your bank account for a pair of laces, most credit cards have enormous interest rates that could have you paying for them twice over if you’re only making the minimum monthly repayments.
5. Rushing into buying a home
Most young Australians grow up being drilled with two ‘priceless life tips’ from their parents:
- Buy a house as soon as you can, and
- Take a jacket with you whenever you leave it.
Unfortunately, the prospect of being a homeowner in today’s property market is about as common as a six year-old choosing a fruit bag over fries in their McHappy Meal. Recent studies are even forecasting that in the next decade, the expected age of first home buyers will rise to 40+.
Still, many Australians don’t believe they’ve hit the big time until they’ve signed on the dotted line for a mortgage that means they’ll have a two-hour commute to work everyday and Cruskits with Vegemite every night for the next thirty years.
So what now?
Ultimately, the majority of these mistakes can be avoided by accurately budgeting your income and expenses, and delaying the purchase of major assets until you have enough money to live comfortably and afford the loan repayments. One way to grow your money without throwing it on the Blackjack table is through long term investments, like exchange-traded funds.
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Clover is a personal financial advisor and an online investment service for Australians.
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