First-Job Fiascos – Part 2
Posted by Gail | Filed under Money Management
Whether you make more or less, you’ll make a huge mistake if you try to live like your friends who make more than you do. And if those friends are still living at home and paying next to nothing for their upkeep, you’ll have a tough time keeping up with the concerts, fast cars and dinners. Fall prey to the Keeping-Up-with-Friends Fiasco and you could dig yourself a serious hole, particularly if you try to do it using your credit.
You don’t have to shun your old friends. Simply choose one or two times you can join them and skip the rest of the outings. Or suggest some less expensive options you can all enjoy together. Don’t get caught up in a flashy lifestyle that has you scrambling for rent money come the end of the month. And don’t get caught in the trap of thinking your life is any less worthwhile simply because you don’t have gobs of money to throw at your own self-indulgences. You’re a grown-up now and it’s time to put away childish things like instant gratificant and me-see-me-want-me-get.
One of the biggest struggles for the newly independent is the sense that their lives were so much better when they lived at home where they had the full run of a very nicely appointed home. If your parents made your life something from a bad reality TV show, the cold shower of independence may leave you a little nostalgic for what you had. You may even feel you’re entitled to the same big-screen TV and upper-middle-class diet to which you grew accustomed. Hey, if you don’t have the means to pay for that lifestyle, you are not entitled to it… yet. You’ll get there. It’ll take some time and some concerted effort. But you have the power to make the life you want.
Don’t fall into the trap of thinking you can have it all right now because you have credit available. If you think that you can take on loads of debt now and then tackle the repayment later when you’re making more money, you’re setting yourself up for a big fall. A big part of growing up is recognizing that you’ll likely never have enough money to do everything you want to do at once. You must prioritize. And you must be patient. And if you have debt commitments like a student loan or a car loan, you must work hard to pay off that debt as fast as you can before you take on another penny in debt.
The Pay-It-Later Fiasco is rampant among the newly independent with student loans who choose to pay the least amount possible on their debt so they have more money available to par-tay. The longer you take to pay off your debts, the more you’ll pay in interest. And that outstanding debt could prevent you from getting approved for something really important, like as a mortgage, later on.
Speaking of taking on a mortgage. Please, please don’t think that just because you now have a steady paycheque you’re ready to take on home-ownership. If you’re convinced you must get into a home of your own immediately, calculate all the costs associated, like your mortgage, insurance, utilities, taxes and the like. Don’t forget home maintenance, which you should calculate at between 3% (for newer homes) and 5% (for older homes) of the cost of the home or the insurance value, whichever is less. Then start living on your income as if you were already paying those costs. So if your total “home ownership” monthly costs are $1,567, and your current rent is $1,200, you would take the difference of $367 and put it in a savings account. Now you’re practicing living on the smaller disposable income you’ll have and you’re saving money for your downpayment and closing costs too. Hey, if you’re planning to move to another part of town so your home will be less expensive, don’t forget to calculate in your commuting costs when you’re figuring out your smaller disposable income.
If you can happily live on less and you have the downpayment to get you into a home, go for it. But if you find you’re struggling to make ends meet, wait until you’ve got more to put down on a home or your income goes up to a more comfortable level before you jump into the market. Contrary to popular opinion, renting is not “throwing money away.” It’s paying for a place to live. Besides, for the first 5 years of your mortgage, 95% of your payment will be going to interest costs… since you’re “renting” someone else’s money.
Becoming independent and earning your first “real” pay cheque is exciting. Learning to manage your money sensibly is an important part of being independent. Keep the most important money lessons front and centre in your mind:
- don’t spend more money than you make
- save something
- pay off your debt
- mitigate your risks.
There now. You’re off to a great start!