NEW YORK, Jan. 6 (Reuters) - If there is one incontrovertible truth in life, it is this: Our younger selves are really dumb. Sometimes extraordinarily so.
Especially when it comes to finances. We load up that credit card and we put off saving because we think that one day we will come into vast riches and everything will turn out just fine.
Of course, we pay for those decisions later, often dearly.
It’s like the financial version of what healthcare reformers are calling “young invincibles” - young people think bad things won’t happen to them. There are biological reasons for why we were all so clueless.
“The prefrontal cortex, where decision-making takes place, continues to develop well into our mid-20s,” says Ifat Levy, an assistant professor of neuroscience at Yale University. “That affects our perception of risk.”
Lack of experience is another factor. “We have to make mistakes in order to learn,” Levy adds.
As a result, most of us have significant financial regrets in our lives, things we really wish we could go back in time and handle differently. For instance, a 2012 survey by the National Foundation for Credit Counseling found that 53 percent of respondents regretted their habitual overspending most of all - the winner by a whopping margin.
That was followed by inadequate saving and lack of retirement preparation - two sides of the same coin, really -with 18 percent and 14 percent, respectively.
Reuters did some informal polling of financial professionals to see what advice they would impart to their younger selves. Even people who grow up to become investment advisers have regrets about how they handled money when they were younger.
Here are four ways to avoid financial minefields in your youth.
1. Don’t pick individual stocks.
When he was young and brimming with confidence, Mark Wilson, a financial planner with Newport Beach, California-based wealth advisers The Tarbox Group, took inspiration from books like Peter Lynch’s “Beating the Street.” The philosophy: with proper research, even Main Street moms and pops can produce market-beating returns just like Lynch, the former manager of the famed Fidelity Magellan fund.
Here’s what Wilson would tell his younger self: Stop trying to be so cute and make low-cost index funds and ETFs the core of your portfolio.
“I was finally fed up with the time stock-picking took and its less-than-stellar performance,” Wilson says. “After all, even most active managers underperform their index.”
2. Spend more on career development.
When we graduate from college, it’s natural to dream that we will never have to deal with courses, term papers or tuition fees ever again.
That’s a missed opportunity for future gains, says Ben Birken, a planner with Woodward Financial Advisors in Chapel Hill, North Carolina.
Sure, saving money is good, but skimping on your full career potential is not. Targeted investments -- learning a new computer language, getting a continuing-education certificate in your field, taking public speaking or sales-oriented programs -- could bear fruit for years to come.
“You’ll get a much better rate of return on a smart investment that increases your lifetime career earnings than you could ever hope to get on a small contribution to a Roth IRA,” says Birken.
Think between 5-10 percent of your annual salary, he advises, to invest in yourself and power future earnings.
3. When crunching housing costs, don’t use the wrong math.
If the nation’s housing market is soaring along with more than 13 percent year-over-year gains - as it is right now, according to the latest S&P/Case Shiller Home Price Indices - that can be a very seductive rate of return. But is all of that 13 percent going to find its way into your pocket?
Nope, says Abigail Rosen, a wealth adviser at Brinton Eaton, a wealth management firm in Madison, New Jersey. There are a flurry of costs that should factor into your math, like repairs, condo or homeowner’s association fees and property taxes - not to mention the 6 percent commission to get out of the place when you sell, if you are planning to use an agent.
Rosen found out the hard way, after she bought a two-bedroom condo in Morristown, New Jersey, at the height of the housing boom in 2005. “I didn’t realize how much all those additional costs would be every month,” she says. “It can add up really quickly.”
And if the market busts again, your equity stake could vanish and you could find yourself underwater on a sizeable mortgage, not to mention locked into a large asset you might not be able to unload.
Bottom line: Don’t let yourself be entranced by that chef’s kitchen and use realistic math before taking the leap.
4. Don’t give yourself a choice.
If we tend to make bad financial decisions when we’re young, here’s an elegant way of getting around that: automate everything and take innate human frailty out of the equation.
By setting up an automatic skim of your income into a dedicated savings account, you won’t even see that money and can’t activate the natural human instinct to blow it all right away.
That’s what Adam Leone, a principal at Westwood, New Jersey’s Modera Wealth Management, would tell a younger version of himself. Even if it involves minor oversights like not fully funding your Roth IRA every year, cutting yourself that early savings slack can have powerfully negative results down the road.
“I used to conveniently skip any savings transfers whenever I wanted to have a bit more fun,” says Leone, now 35. “Now I have a few more years on me -- and the wisdom to realize that saving only gets harder.”