Your 20s are a time when you get to start your adult journey. This means fresh out of college, where you navigate new careers, relationships, and living situations. It’s easy to get lost with everything that you mishandle your funds. With that, we’re bringing you the 10 biggest mistakes you can make in your 20s financially and how you can avoid getting into them.
10. The High Cost of ‘Lifestyle Creep’
As your income increases, you will want an upgrade in your way of living. That is when the lifestyle creep occurs, where you expand your savings or exceed your income. It leaves you with little to no savings at all. To avoid this, create a budget and prioritize your financial goals before putting money towards discretionary spending. When you get a raise, commit it to saving and investing at least half of it before upgrading your lifestyle.
9. Mishandling Student Loans
Student loans stand to be a burden for many adults, but the wrong repayment choices will make it worse. Common mistakes are not understanding the terms and failing to check into income-driven repayment (IDR) plans. With that being said, take time to understand all your student loan options. For federal loans, research IDR plans that can make your monthly payments manageable. As for high-interest private loans, refinancing can be a smart move, but be careful with weighing the pros and cons.
8. Not Having an Emergency Fund
Life is unpredictable, so having no emergency fund because of an unexpected car repair, medical bills, or job loss will get you into high-interest debt. With that, your goal should always be to save 3-6 months’ worth of living expenses in your high-yield savings account. Automate your savings so a portion of your paycheck gets transferred to your emergency fund.
7. Carrying High-Interest Credit Card Debt
Relying on credit cards to fund a lifestyle you can’t afford will lead to financial trouble. Average credit card interest rates alone can already spiral into a mountain of debt. The common mistake? Making the minimum payment where it mounts more extra fees. With that, treat your credit card like your debit card by charging what you can afford to pay in full next month. If you’re already in debt, create a plan to pay them off as aggressively as possible.
6. Lacking a Financial Plan or Budget
If you’re not tracking your income and expenses, then you have no idea where your money is going. This lack of awareness will make it impossible to save effectively and reach your financial goals. Immediately create a simple budget plan to track your cash flow. Practice the 50/30/20 rule with 50% for after-tax income, 30% for wants, and 20% for savings and debt repayment. Download a budgeting app or create a spreadsheet to plan and track your budget.
5. Skipping Essential Insurance
Many young adults see insurance as an unnecessary expense. But being uninsured or underinsured is a financial risk, as a single major medical event can lead to bankruptcy. Even a simple theft in your place could mean losing everything you own. At a minimum, ensure you have at least health and renters insurance. If you’re under 26, you may stay on your parents’ health insurance plan. If not, try to explore options through the Affordable Care Act (ACA) marketplace or your employer.
4. Not Reporting Side Hustle Income
In the gig economy, it’s easy for people in their 20s to earn extra income. However, many young adults make the mistake of not reporting this income to the IRS. The law is always clear that you must file a tax return if you reach the net earnings of $400 or more from self-employment, like a part-time or temporary gig. Failing to report can lead to penalties, back taxes, and interest charges that would add up to debt. With this, track your income and expenses to set aside a portion for earnings. Pay your estimated taxes quarterly to avoid those penalties.
3. Lacking Financial Literacy
No good financial decision will come if you don’t understand the basics of personal finance. With this, take responsibility for your financial education by reading books, listening to podcasts, and following reputable financial experts. Start with the basics of budgeting, saving, debt management, and investing. Understand its concepts to be capable of managing your financial life.
2. Making Emotional Investment Decisions
The fear of missing out and panic selling are the most destructive forces in investing. With that, if you make decisions based on emotion, then that’s one financial disaster. Develop a long-term investment plan and stick with it. Understand that market fluctuations are normal, and timing the market is a losing game. Consistently invest in a diversified portfolio of low-cost index funds or ETFs and hold them for the long term.
1. Not Investing Early and Consistently
One of the many regrets among Americans is not investing earlier in life. Every dollar you invest in your 20s has the potential to grow more than a dollar invested in your 30s or 40s. With that, start investing now, even in just small amounts you can afford. Open a Roth IRA and set up automatic contributions. The key is to start early and be consistent.