I'm in my early 20s and want to get a head start on financial success, but I don't want to make mistakes that could prevent me from achieving my goal. What do you suggest? --K.T., North Carolina
My first suggestion is to lighten up a little. It's smart to want to get off on the right foot in your financial life. But your 20s is also a time to have some fun, explore different paths and leave yourself open to serendipity. If you get too hung up about making a wrong move, you could miss out on satisfying and rewarding experiences. Besides, making and then rebounding from mistakes is an important way to learn and grow.
That said, it's also true that some mistakes can inflict far deeper and longer-lasting financial damage than others, even if they don't seem so dangerous at first glance.
Below are five financial faux pas with the capacity to seriously undermine your economic prospects. Avoid these major missteps, and you'll dramatically increase your chances of achieving financial success.
Mistake #1: Getting A Late Start On Saving.
More than any other single error, I'd say this is the one that prevents people from attaining at least a measure of financial security. For example, in a recent survey of retirees by Pentegra Retirement Services 39% of those polled said they regretted not having started saving sooner, and 63% said the most important advice they could offer to people starting out would be to get an early start on saving.
The oldsters know what they're talking about. A 25-year-old earning $30,000 who saves 10% of salary a year would have a nest egg of just over $620,000 at 65, assuming 2% annual raises and a 6% annual return on investments. If that person holds off just five years, the size of the nest egg falls by almost $140,000. Waiting 10 years shrinks it by more than $250,000.
To see for yourself how putting off saving for even a few years (as well as not saving enough) can stunt your financial prospects, check out this Will You Have Enough To Retire? calculator.
Fortunately, this error can be easily sidestepped. If you have a 401(k) where you work, sign up for it and contribute at least enough to take full advantage of any company matching funds.
Related: Are you behind on retirement saving?
If you don't have access to a 401(k), open a Roth IRA or Traditional IRA account at a mutual fund company and fund via automatic monthly transfers from your checking account.
While you're at it, accumulate an emergency fund of at least three months' worth of living expenses in a savings account so you'll have a cushion to fall back on in the event of a job layoff or unexpected expenses.
The main point, though, is to get into the habit of saving regularly and maintain that regimen throughout your working life.
Mistake #2: Taking on unnecessary debt.
Sometimes it makes sense to borrow -- say, to buy a house, purchase a car or finance an education that can increase your earning power. But it's the debt we take on to maintain a lifestyle that exceeds our earning power that gets us in trouble.
And make no mistake, paying down debt can strain your budget. According to NerdWallet's latest annual survey on consumer debt, the average household is shelling out more than $6,650 in interest payments alone per year.
Related: When will I be debt-free?
Before you borrow, ask yourself: Is this something you truly must have? And if the answer is yes, then ask: Could you get by with a less expensive version of it? And finally, consider whether the monthly principal and interest payments you'll make for years might be put to better use going into savings and investment accounts that can grow in value and provide a cushion against economic setbacks.
Mistake #3: Buying into Wall Street's 'investing is complicated' mantra.
The message investors get from many Wall Street firms boils down to this: You need to watch the financial markets constantly, spread your money among all sorts of arcane and complex investments and be ready at a moment's notice to dump what you own for new investments. And, of course, to pull off all this successfully, you need their help, for which you must pay a handsome price.
Nonsense. No one, not even market pros, can consistently outguess the financial markets. And research by University of California at Berkeley finance professor Terrance Odean shows that trying to do so by frequent trading is more likely to hurt than enhance your returns.
You're much better off with a less-is-more approach: build a basic portfolio of broadly diversified stock and bond funds that matches the level of risk you're willing to take -- and then, aside from occasional rebalancing, stick with that portfolio regardless of what the market is doing. This risk tolerance-asset allocation questionnaire can help you arrive at a blend of stocks and bonds that makes sense for you.
Mistake #4: Overpaying for financial help.
Whether it's the annual expenses you pay to a mutual fund manager or the fees you shell out to an adviser to help you choose the right funds and provide other financial advice, the fact is that paying more than you have to drags down the returns you earn and makes it harder for your savings to grow. Which is why it makes sense to hold the line on such costs as much as possible.
When it comes to investments, the easiest way to rein in expenses is to stick as much as possible to low-cost index funds and ETFs. Doing so can easily save you upwards of 1% a year compared with the typical stock mutual fund.
Related: How much are 401(k) fees costing me?
If you feel you need to work with a financial adviser, make sure you know in advance exactly what you'll pay, what specific services you'll get for your dough -- and comparison shop to make sure the fees the adviser you're considering are competitive.
Other options are hiring an adviser on an hourly basis instead of paying a percentage of assets or signing up with a "robo-adviser," an online service that uses algorithms to provide inexpensive investing advice.
Mistake #5: Failing to monitor your progress.
You don't have to (and shouldn't) constantly obsess about money matters. But neither can you just set a course and then assume all will be fine going forward. You need to periodically review your finances -- say, once a year or so -- to ensure you're making headway.
The most comprehensive gauge of whether you're making progress is to track your net worth -- that is, the difference between the value of your assets and liabilities, or what you own vs. what you owe.
If you're saving regularly and investing sensibly, over time your net worth should grow. If it's stagnating, it may be a sign that you're not saving enough, not investing your savings sensibly or taking on too much debt.
You can estimate your net worth using this simple net worth calculator. By doing this calculation every year and comparing the results to those of previous years, you can easily see whether your net worth is growing.
To assess other aspects of your finances -- such as whether your current saving and investing regimen has you on a path to a secure retirement -- check out these five online tools, all of which are free.
Clearly, there are also many positive steps you can take to enhance your prospects, one of the biggest being to nurture your career so that you can earn (and save) more during your working years. But good defense still counts for a lot. And if you avoid making the five mistakes above, you will dramatically improve your odds of achieving the financial success you seek.
