Our 20s are an impressive decade of firsts. There’s the first big job, first time living on your own, first car, first significant relationship, and so on.
It’s also a time when many of us are faced with managing our own money for the first time.
There’s a lot to learn – from the confusing financial lingo to all the different financial to-dos. How do you make sure you’re making the best decisions? Well, you can start by knowing some key things to steer clear of.
Read on for the top 8 money mistakes to avoid in your 20s.
Mistake #1: Not Saving for a Rainy Day
When I first graduated from college I was overwhelmed by all the financial priorities I faced: paying off debt, contributing to a retirement fund, saving for my own place, buying a car … I had no idea what to focus on first. Then I started working at a financial company and I learned that the number one thing to start with is an emergency fund of at least $1,000.
Focusing all my effort on getting to that $1,000 paid off, and continues to pay off whenever I have a car repair, unexpected medical bill or higher-than-average utility bill. Building an emergency fund is incredibly important to keep you out of debt. And there will be emergencies. It’s not a matter of ‘if,’ but a matter of ‘when’ and an emergency fund can keep your head up during those times.
Mistake #2: Not Understanding Your Relationship with Money
Money is just about checks and balances, right? Wrong. Our relationship with money is incredibly complicated and multi-dimensional. We oftentimes spend with our hearts, not with our wallets. Because of this, it’s incredibly important to understand your unique approach and relationship to money.
Are you a spender or a saver? Does stress trigger spending? If you got $1000 right now, what would you do with it? How do you feel about your finances? All of these types of questions can help you understand what motivates your behavior around money.
Mistake #3: Thinking Credit Cards Can Support Your Lifestyle
It’s easy for credit card debt to rack up fast when you’re young and your income isn’t quite up to the lifestyles of the rich and famous. I recommend sticking to a debit card or using the envelope system when you’re relatively new to managing finances. Credit cards are fine if you know that you can pay the balance off each month, but until you get a grasp of your spending trends, it’s best to stick with the cash you already have.
Not sure what type of lifestyle you can afford? Use a budget. Try keeping track of every purchase for at least a month. Use apps like mint.com or this budget spreadsheet to make the process easier. Then, make sure you’re spending less than you’re making. If not, brainstorm ways to increase your income, or find areas to cut back on spending. Just remember, using a credit card is not a way to round out your income.
If you do have credit card debt, don’t panic. You’re not a bad person and it’s not the end of the world. But you do need a strategy to pay off that debt. Try using the Snowball Method, which provides you with the motivation to keep paying off your debt.
Mistake #4: Not contributing to a Retirement Account
You’ll most likely get a job in your 20s that offers a retirement account and employer match. Do your best to contribute! An employer match means they’ll match your contributions, up to a certain percent (that’s usually 3-6% for most companies). A good rule of thumb to determine how much you should contribute is 7%-15% of your income. But, any bit helps at this age! You have time on your side and compounding interest will work wonders. (This is interest earned on interest … which basically means your money starts making more money as the balance grows.)
If you don’t work for an employer that offers retirement account options, you can still save for retirement by opening up an IRA (Individual Retirement Account). You’ll most likely have the option to choose a Traditional IRA or a Roth IRA. The main difference between the two is that in a Roth IRA the money you contribute is taxed first, not upon withdrawal in retirement. With a Traditional IRA, you get taxed in retirement on the withdrawals you take. Roth can be a good option if you think you’ll be moving to a higher tax bracket in retirement. Either way, starting to save for retirement now is important.
Mistake #5: Not Having Renters Insurance
I’ll admit, it took me a few years to finally get around to buying renters insurance, but the peace of mind it has brought me is worth it. Renters insurance protects your property from theft or damage, and it can also include liability protection, which can protect you from a lawsuit if someone is hurt in your apartment.
You may not think that you have much to protect at this time, but take a moment to look around at your stuff. Makes sure to take note of things like computers, television, clothes and furniture. How much would it cost to replace all of that? Renters insurance is one of the cheapest forms of insurance out there, and would help provide money to replace anything that might get stolen or damaged.
Mistake #6: Pretending Your Student Loan Debt Doesn’t Exist
According to studentloanhero.com, the average class of 2016 graduate has $37,172 in student loan debt, and 44.2 million Americans have student loan debt. So, if you’re faced with paying old Sallie Mae back, you’re not alone.
That being said, many college graduates sign up for student loans without truly knowing the terms or implications of that debt. I know when I graduated I had no clue what capitalized interest, repayment plans or unsubsidized vs. subsidized meant. Unfortunately, the brunt of that education falls on our own shoulders. I recommend you read up about student loans from websites you trust, and take some time to look through your loan terms. Call your loan servicer to talk to their representatives to answer any questions you have – even if you feel stupid. They’re paid to be helpful and answer every question – no matter how “simple” you might think it is.
Then, come up with a plan for paying back your loans. You may decide to sign up for a repayment plan offered through your loan provider. Or, you can use the Snowball Method as mentioned above, to pay your debts off, one by one. Bottom line is, create a plan of attack. Get more tips in this post: How to Deal With Student Loans.
Also a great first step is simply listing out all the details of your student loans. Here’s a free spreadsheet that will help you do this. Knowing all your loan details is an important starting point.
Mistake #7: Not Talking to Your S.O. About Money
If you found love in your 20s – awesome! Now have you had the money talk? Yes, I mean sitting down with your Significant Other and having a conversation about money. As I mentioned above, our relationships with money are intricate and unique. You may be a spender, but your partner may be a saver. How are you going to navigate that dynamic in your relationship?
Arguments about money are the leading cause of stress for couples, according to CNBC. Before it becomes a problem, take time to sit down with your loved one and talk about your values and beliefs. Here are some questions to get started:
- How did your family handle money growing up?
- How do you think that has affected your view of money?
- What is your vision of “enough?”
- What debts are you bringing into the relationship? Spending habits? Income?
- What are some big goals you have?
Mistake #8: Beating Yourself Up for Past Mistakes
Think all the finance “experts” never made a mistake? Think again. Many of the most successful finance bloggers I know, started writing to document their journey getting out of debt, or share what they’ve learned from past financial mistakes.
So if you find yourself making or having made any of these “mistakes,” don’t beat yourself up for it! None of us are perfect, and the best thing you can do is give yourself some leeway when you trip up.
Making financial improvements takes time, and is full of many little setbacks, but as long as you keep learning and adjusting from your mistakes, you’ll be well on your way.
What money mistakes have you made so far in your 20s or did you make when you were in your 20s? Anything additional you would add to the list or emphasize?