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Ignoring Finances When Young is a Risky Game

This is a guest article by Kevin. You can find Kevin at 20s Money [1], where he writes about financial topics geared specifically for young people in their 20s.

The Perfect Storm

Young people are in dire financial conditions. A weak job market, crushing debt levels and a lack of fiscal responsibility are a perfect storm resulting in the disastrous shape of most young people’s financial lives.

Ignoring the Numbers

There is great risk in not addressing the financial shape of one’s life when they are young. Most people are aware of the numbers, that if you start saving X amount of dollars when you’re 25, it will result in substantially more money when compared to someone who started saving when he or she is 35. We’re so aware of these numbers, that I think many of us are numb to them. They don’t have quite the impact that they should even though they tell a very accurate story.

The reality is that unless you start your journey towards financial health and financial independence now, when you’re young, there is a strong chance that you won’t achieve your financial goals.

Retirement is an easy “end goal” to focus on. Many of us naturally assume that we’ll make more money down the road; therefore, we’ll be able to put money towards retirement at that time. This will be sufficient for retirement, right? Furthermore, many of us believe in the assumptions that we’ll earn upwards of 10% every year on our money, and because of these easy returns, we shouldn’t concern ourselves with retirement yet. After all, I’m only 25!

The Risks for Young People

Unfortunately, I believe that there are significant risks to the financial future of young people today.

Crushing debt levels. Debt at the individual level as well as the public level will take time to unwind, and every dollar put towards paying down debt is a dollar that is not put towards retirement or some other financial goal.

Prolonged inflation. It is a serious risk, and if it materializes, it will make our savings lose its purchasing power. Simply put, our money won’t buy as much tomorrow as it does today. This means you will need even more money saved.

Lower returns. Many credible economists believe that the best years of the American economy are behind her which means that money invested in the U.S. stock market might not earn the long term returns that we have become accustomed to. It’s better to assume a more reasonable 4-5% return over time in my opinion instead of the often mentioned numbers such as 8-12%. A lower return means you must save more.

Sacrifice and Save More Money

It is because of these reasons I’ve outlined that saving, significant saving, is extremely crucial for young people today. There is no free lunch or easy alternative with regards to saving. It requires sacrifice and giving up on things that you want to buy. Rather than getting the latest gadget or a big house, maybe you should put more money towards your future.

Young people can have a bright future, but it will require sacrifice and dedication. Even if not all of the risks outlined in this article materialize, you should acknowledge that there most likely will be some sort of real obstacles in the way of financial independence. I encourage you to take a hard look at your financial picture, your lifestyle and the current actions you are taking towards your financial goals. Are you saving enough? Are you living beyond your means? Are you paying down debt? Be honest with yourself and make the necessary changes.