For many, your 20s is the decade you start living your best life. Maybe you’ve got your own place — or one you’re sharing — and are living more independently. Or, you’ve got a reliable job that pays the bills with enough left over to splurge on an evening out or an upgrade to your iPhone. And hopefully, you might have some money in the bank to put toward traveling or a new car. But even if it all seems to be moving in the right direction, financial problems may be brewing that could cost you big time in your 30s and beyond. Here are five of the biggest money mistakes you can make in your 20s and how to avoid them.
1. Getting on the carousel of credit card debt
On the surface, buying a $1,000 TV for only a $25/month minimum payment might seem like a great deal. But with a 20% interest rate or higher, you’ll spend almost $1,000 more to stream “Stranger Things” by the time you finish those installments. Some debt might be unavoidable as you’re starting off, but save up for things that are wants instead of needs to get more out of your hard-earned paychecks.
2. Thinking like a superhero
You may feel somewhat invincible or that nothing bad will ever happen in your life, but accidents and illness can strike anyone. Skimping on insurance once you age out of your parents’ plan is taking a big financial risk that you might not have the means to recover from. A reasonable monthly amount that you can budget for now can help you avoid out-of-pocket expenses to replace a stolen laptop — or pay a costly medical bill.
3. Living large
Whether you rent or own, don’t let your monthly housing costs eat up so much of your earnings that you’re forced to rely on credit cards to meet your other expenses. Many experts advise that no more than 30% of your gross (before-tax) income should go toward all housing expenses, including rent/mortgage, insurance, utilities and HOA fees. If that amazing apartment you found is a budget buster, consider a roommate to split the costs.
4. No Plan B
Things aren’t always going to go the way you planned. Having an emergency fund is critical to ensuring you’ll be able to handle your expenses even when something unexpected, like a major car repair or job loss, happens. Strive for three to six months of expenses banked in a FDIC, high-yield savings account.
5. Neglecting your future self
One thing you have more of than older people is time. While retirement may seem far off on the horizon, put time on your side by investing a small amount now that can add up to a big amount later. Maximize the power of compounding by starting early. Assuming an average annual return of 8%, if you save $50 per month starting when you’re 25, you’ll have more than $155,000 by the time you’re 65. But if you start saving at age 35, you’d only have about $68,000. It only takes a small amount now to make a big difference for your future self.
If you’re not sure where to start or how much money you should put toward debt reduction, emergency savings and retirement, consider getting some help from a qualified Financial Professional. You don’t need to wait until you get your next salary bump for professional advice to make a difference. The small changes you make now can have an outsized effect on your financial future — and the cost of waiting to start may be more than you’re willing to pay.
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