Ah, yes, the roaring 20s! A decade filled with career changes, adventurous travels, big moves, and, perhaps, weddings and growing families. But while these years are filled with many exciting milestones, they also come with their fair share of financial pitfalls. Between trying to navigate what might be your first taste of financial freedom, paying off student loans, covering your own health insurance, wanting to do fun and exciting things with your friends, and so much more … there’s so much movement in and out of your wallet each week. It can be overwhelming, but we’re here to tell you to fear not!
With the right strategies in place, you can sidestep these common financial mistakes and set yourself up for future success. Let’s dive in!
1. Living Beyond Your Means
It’s tempting, especially when scrolling through Instagram, to want the latest gadgets, fashion, or exotic getaways. But remember: living beyond your means now can lead to significant debt later on. It may seem like you have all the time in the world to save, but, before you know it, your 20s will be gone and you’ll be drowning in credit card debt. What’s the big deal, you ask? Well, you’ll find that debt makes it harder to get approved for home loans or puts unnecessary stress on things such as planning for a wedding or starting a family. It’s good to have fun while you’re young, but it’s important to be conscious of your future goals.
So, what can you do to ensure that you’re staying balanced between spending and saving? Create a realistic budget and stick to it. Prioritize needs over wants, and if you do splurge, make sure it’s planned and won’t derail your financial goals.
2. Not Having an Emergency Fund
Life has a funny way of throwing curveballs — unexpected car repairs, medical bills, or sudden job losses. It’s easy to think ‘Oh, that won’t happen to me.’ when it comes to things like this. People rarely think bad things will happen to them, but the truth is that these things can happen to anyone. And, if they do, you don’t want to be left without the means to support yourself.
Start building an emergency fund today. Aim to save up three to six months’ worth of expenses, and keep it in a separate, easily accessible account. (That way there’s no temptation to use it!)
3. Avoiding the Retirement Conversation
It’s easy to think retirement is ages away, especially in your 20s when you’re just starting your career. It’s true, you do have a long way to go. But the earlier you start putting that money into savings, the more time compound interest has to work its magic.
For example, if you’re saving $475 per month and earning an average annualized return of 8 percent, your numbers will look something like this by the time you retire:
| Starting Age | Nest egg at age 67 |
| 22 | $2,379,328 |
| 27 | $1,594,751 |
| 32 | $1,060,782 |
So, if your employer offers a 401(k) match, take full advantage. Open an IRA account, and aim to increase your contributions annually.
4. Ignoring Your Credit Score
Your credit score is a pivotal number. It is an influencing factor in loan approvals, housing options, interest rates, and even some job opportunities. Don’t ignore a bad credit score. And, if you have one, it’s never too late to start taking the necessary steps to make it better!
Regularly check your credit report for errors. Pay your bills on time, and avoid maxing out credit cards. If you have outstanding debt, create a repayment plan.
5. Succumbing to Lifestyle Inflation
Just because you got a raise doesn’t mean your expenses should skyrocket too. Whenever you receive a raise, set up automatic diversions for a portion of it to go directly to savings or investments before you get a chance to spend it.
6. Not Investing Due to Fear
The world of stocks, bonds, and mutual funds can be intimidating, but avoiding it means missing out on potential growth. Start small. Consider consulting a financial advisor or using robo-advisors, which can provide guidance based on your risk tolerance.
7. Neglecting Insurance
Insurance might feel like an unnecessary expense—until you need it.
Turning 26 is a pivotal moment for most in their 20s because they suddenly have to find their own health insurance plan. And you’d be surprised how many people opt to go without health insurance.
As we said before, it doesn’t sound like that big of a deal … until something happens.
And it’s not just health insurance! Make sure that you have proper auto, renter’s/home insurance, and even life insurance especially if you have dependents.
8. Sticking with High-Interest Debt
High-interest debt, especially from credit cards, can rapidly spiral out of control. Prioritize paying off high-interest debt. It might be good to consider a debt-consolidation loan or look into balance transfer credit cards.
Don’t Stress Out!
Remember, everyone’s financial journey is unique. While missteps are a natural part of the learning process, being proactive and informed can help you navigate these pivotal decades with confidence and avoid common financial mistakes.
If you feel like you’re already in a financial pit, don’t stress! It’s good that you’re realizing it now while there’s still time to turn things around. Take a deep breath. Get an idea of what you need to focus on moving forward. And set your mind to it. Anything is possible with the right amount of focus and effort!
Trust us, your future self will thank you!