Money Management

Financial mistakes made while you’re young can have a lifelong impact. See what Graham Stephan considers the worst financial mistake young people make. 

Graham Stephan knows a thing or two about being successful at a young age. Just 33 years old, he’s done well as a real estate investor, built a large following on social media for his personal finance content, and is reportedly a multimillionaire.

In a recent video (set to the Interstellar soundtrack, a bold choice for financial advice), Stephan was asked about the worst financial mistake he sees 20- to 30-year-olds making. He says there’s one move many young adults fail to make that could help you become a millionaire.

Here’s the worst financial mistake you can make as a young adult, according to Graham Stephan

Stephan says that the worst financial mistake young people make is “not setting up a Roth IRA.” An IRA is an individual retirement account, and a Roth IRA is a version that lets you make tax-free withdrawals in retirement. Since they’re retirement accounts, you need to wait until you’re at least 59 1/2 to make withdrawals, otherwise there’s a penalty.

As Stephan explains it, when you set up a Roth IRA at a young age, you have decades for that money to grow. If you have it invested, it can earn compound interest, which essentially means your money earns interest on top of interest it has already earned. Stephan says that after 40 years, an $800 investment could be worth $8,000.

That might seem like a lot, but it’s actually a very conservative estimate. The average stock market return is about 10% per year (before inflation). If you invest $800 and get an 8% return, after 40 years, you’d have $19,418.71.

The longer that you have your money invested, the greater these gains can be. That’s why investing while you’re young is such a powerful way to build wealth.

Is not opening a Roth IRA really a financial mistake?

Stephan goes over how you can benefit by setting up a Roth IRA, but most of the things he mentions are really just benefits of investing in general. Your money can grow significantly in any of these accounts:

Roth IRATraditional IRA401(k)Individual brokerage account

The advantage of Roth plans, which include Roth IRAs and Roth 401(k)s, is tax-free withdrawals. Traditional IRAs and 401(k)s don’t have that, instead allowing you to deduct contributions on your income taxes. You aren’t able to deduct Roth contributions.

As you can see, each type of retirement account has its pros and cons. The general rule is that if you think you’ll be in a higher tax bracket in retirement, you should go with a Roth plan. If you think you’ll be in a lower tax bracket, go with a traditional plan. Or, you could also open both a traditional and Roth IRA, and then split your contributions between them.

A Roth IRA can be a good choice while you’re young, because you may still be on the low end of your earning potential. For example, let’s say that:

You’re in your 20s and making $40,000 per year.You’re eventually going to be making $80,000 per year.You’ll need $60,000 per year in retirement.

In this case, it would probably be better to go with a Roth IRA. You effectively pay those income taxes now, while you’re making $40,000 per year, to avoid income taxes later when you’re withdrawing $60,000 per year.

The sooner you start investing, the better

Saying that not setting up a Roth IRA is the worst financial mistake young people make is a bit dramatic. There are plenty of bigger mistakes, such as spending frivolously and ending up in credit card debt. And you wouldn’t necessarily be making a mistake if you didn’t have a Roth IRA, but were investing through another type of retirement account, such as a 401(k).

Regardless, Stephan does point out something very important. Investing while you’re young is one of the best financial habits you can build. The retirement account you use is your call, but it’s well worth opening one and adding money to it regularly.

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It’s best to apply for pet insurance as soon as you bring a new pet home. Read on to see why. 

Adopting a pet can be a very rewarding experience. But it can also be an expensive one.

Between food, supplies, and vet checkups, you might end up having to dip into your savings account on a somewhat regular basis to cover the costs involved. And that doesn’t even account for pet care emergencies you might run into.

Another expense you’ll need to bear when adopting a pet is buying pet insurance. And because of the cost involved, you may be inclined to hold off on getting insurance as long as you can. But delaying the purchase of pet insurance could actually end up costing you in a very big way.

The problem with putting off pet insurance

Changes to human health insurance have made it so insurers have to provide coverage for pre-existing conditions. But pet insurance works differently.

Pet insurance companies are not required to pick up the tab for treatments related to pre-existing conditions. And so the longer you wait to buy pet insurance, the more you risk having an issue arise with your pet that gets excluded from your coverage.

And if you’re thinking that you’ll just lie on your pet insurance application or neglect to disclose conditions you’re aware of, think again. It’s common for insurance companies to verify that you’re telling the truth by looking at vet records. So if your pet has diabetes and you don’t list it as a pre-existing condition, but your pet’s veterinary records indicate that your pet is on insulin, then you’ll likely be denied coverage (or, at the very least, you’ll be told you need to change your disclosures).

Don’t wait to get pet insurance

The idea of having to pay for pet insurance may be daunting, especially at a time when you’re looking at so many other pet-related expenses. But when you put off pet insurance for too long, you risk having to foot the bill over time for conditions your insurer won’t be willing to cover.

The good news is that pet insurance may end up being less expensive than you thought. Progressive reports that the cost of pet insurance for dogs can average as little as $9 a month and as much as $72.53. For cats, the average cost of pet insurance ranges from $6 to $38.53 per month.

Of course, these are just averages, and you may be looking at different numbers based on the pet you have. Either way, it’s important to shop around for pet insurance rather than just go with the first company you talk to. Comparing rates could help you save money.

But don’t just look at rate quotes when comparing your options. Look at what coverage each insurance plan gives you, too. In some cases, it may be worth it to pay a higher premium to get superior coverage.

Either way, though, don’t expect your pet insurance company to pay for services relating to a condition your pet already has. And the sooner you get pet insurance, the less likely you’ll be to have more issues arise that your insurance policy won’t cover.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has no position in any of the stocks mentioned. The Motley Fool recommends Progressive. The Motley Fool has a disclosure policy.

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Although it goes against conventional wisdom, I’m comfortable keeping a portion of my emergency cash reserves in a CD. Read on to see why. 

It’s important to have money set aside for financial emergencies, whether it’s car repairs, medical bills, or a period of unemployment. And you’ll generally hear that your emergency fund should contain enough cash to cover a minimum of three months of essential living costs. The logic there is that if you were to lose your job, that sum could help you pay your bills while looking for work so you don’t land in debt.

As a general rule, the best place to keep your emergency fund is none other than a savings account. And while I happen to keep the bulk of my emergency fund in a regular savings account, I do have a portion stashed away in a certificate of deposit (CD). Here’s why that works for me — even though it may not be the best idea for the typical saver.

Why I have more wiggle room with my savings

The reason people are advised to keep their emergency cash in a regular savings account is simple. With a regular savings account, you can take withdrawals whenever you want, and without any sort of penalty.

CDs work differently. You’ll commonly snag a higher interest rate on your money with a CD versus a savings account. But in exchange, you’re committing to keeping your money in that CD until it matures. That could happen in six months, a year, or longer — it depends on the term of your CD.

If you end up having to remove money from your CD to deal with an emergency expense, you’ll be assessed a penalty. Now, that penalty varies by bank, but at Capital One, for example, you’re looking at a penalty of three months’ worth of interest for cashing out a CD with a term of 12 months or less. Since you might have to raid your emergency fund at any time, you risk facing a penalty when you keep that cash in a CD.

But the reason I have part of my emergency fund in a CD is simple — I probably have a larger emergency fund than most people. A big reason for this is that I’m self-employed with a variable income. If my clients were to pull my work on me out of the blue, I’d need to build up a whole new base. And since I’m not eligible for unemployment as a self-employed worker, I need extra backup in savings form.

Also, many people I know have the option to turn to their parents for financial support in a dire situation. I don’t have that option. So I need to protect myself by keeping a 12-month emergency fund on hand.

Because I have 12 months’ worth of bills in savings, though, I can tie some of that cash up in a six-month CD and earn a higher interest rate on it. If I blow through my first six months’ worth of expenses, by the time I need my remaining money, my CD will have come due, so I won’t be looking at a penalty.

Of course, I hope things don’t come to that. But either way, I feel that keeping some of my emergency savings in a CD is a financially sound move.

Be careful with your emergency fund

The idea of earning a higher return on your emergency fund may be tempting. But unless you have a larger emergency fund, you probably want to keep all, or at least most, of that money in a regular savings account. What you lose in the form of a lower interest rate than a CD, you gain in the form of peace of mind — which is the whole point of having an emergency fund to begin with.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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