By Martin A. Smith, CRPC®, AIFA®, President, Retirement Planning Financial Advisor™, Wealthcare Financial Group,...
With all the exciting milestones that occur in your twenties, your finances and financial future may not always be at the forefront of your mind. But ignoring your finances early in life can be quite costly later on. Here are nine of the worst money mistakes to avoid in your 20s and what you should do instead.
1. Thinking you’re too young to save for retirement
At 20, retirement can seem like it’s a lifetime away. This mindset can lead you to make huge financial mistakes, like refusing your employer’s 401(k) match (which is basically giving up free money.)
Investing around 10% of your gross income in a retirement fund is essential because it lays the foundation for your future financial security and establishes a good saving habit. If you can’t afford that much right now, investing even small amounts regularly is far better than investing nothing.
2. Thinking you’re too young to save, period
Retirement isn’t the only thing you should be saving for. Experts suggest saving 25% of your gross income, though that includes retirement contributions and employer matches. Your savings should include an emergency fund of at least three to six months of expenses, as well as savings for specific goals and purchases. And as with retirement savings, you don’t have to hit the full percent right off the bat. What’s more important is establishing a habit of saving significant portions of your income.
3. Neglecting your student loans
The average 2017 graduate owed $39,400 in student loans. As tempting as it may seem to limp along paying the minimum, it’s in your best interest to pay student loans off as quickly as possible. If you don’t, you’ll end up paying far more in the long term. Besides, you don’t want to still be saddled with your student loans when you begin thinking about a house or other significant purchase.
4. Racking up unnecessary credit card debt
Some debt, as with student loans, can be unavoidable. But it’s very easy to build up credit card debt that can harm your credit and burn up huge portions of your income. The easiest fix? Treat your credit card like cash and pay your balance on time, every time. When you do need to carry a balance, be sure to make more than the minimum payment when you can, and pay it off as quickly as possible.
5. Ignoring your credit score
Your credit score is extremely important to your future ability to secure loans and other lines of credit. You should do your best to establish habits that increase your score, such as paying your bills on time and avoiding maxing out your credit cards.
6. Relying too heavily on your parents
Especially in your early twenties, it can feel convenient to hit mom and dad up whenever you need a quick cash infusion. However, being overly-reliant on your parents is one of the worst things that you can do for your financial independence. Once you have your own independent income, it’s important that you take every step to establish your own responsible habits with money.
7. Failing to formulate a budget
Going hand-in-hand with the previous point, establishing a budget is absolutely essential for everyone in their twenties. There are plenty of online tools to help you determine and track a responsible budget, so there’s no excuse for just winging it.
Overspending is one of the easiest mistakes to make in your twenties, and it happens even when you’ve written out a budget. Social occasions, impromptu shopping trips, and even daily coffees can add up to excessive amounts of spending. This mistake can quickly compound into debt and an inability to save for your future, so it’s important to rein in your spending habits as quickly as possible.
9. Never investing in quality products
As you grow up, you begin to realize that cheaper is not always better. Consistently buying cheap products that wear out faster can actually cost more in the long term. Part of your budget should account for the cost of spending a little more on quality basics such as shoes and kitchenware.
As a twenty-something, you are at a perfect age to set yourself up for future financial success. For more information about how, set up your free financial checkup appointment with Marine Federal today. We can help you understand your individual financial situation and help you avoid mistakes that could cost you later in life.
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