How to Avoid the Biggest Financial Mistakes When You’re in Your Twenties

If you are recently graduated or just starting out in your career, budgeting, planning and saving for the future may be new concepts for you and hard to envision. Your financial life can be quite complex and challenging, and you are bound to make some mistakes. Of course, trial and error is part of learning. When money is involved, you want to make as few mistakes as possible. Indeed, being money-wise in these earlier years can really pay off in later years.

As with everything in life, the more you know, the better off you are. The best thing you can do is to educate yourself about managing your money as much as you can. It may seem overwhelming in the beginning but, the more you practice, the easier it will become. In today’s article, we will highlight some of the financial mistakes to watch out for in your 20s and how to best avoid them.

Common Financial Mistake #1: Relying on Your Parents

Money can add tension to any relationship, even one between a parent and their child. It’s important as you get started on your path to financial independence that you don’t fall into the bad habit of relying too heavily on your parents. If you’re in financial trouble, it’s important to know that you can turn to your parents if you need to because we all need a support system. Consistently relying on your parents to help you financially, however, is both risky and irresponsible.

Your primary focus at this point in your life needs to be on creating an independent, stable financial situation, and you can’t do that if you constantly turn to your parents for financial support. Regardless of whether you live at home or have started living independently, you should focus on creating a budget, clearly defining your short and long-term financial goals, paying your own bills, and starting saving for both emergencies and retirement.

Common Financial Mistake #2: Ignoring Student Loans

Many people in their twenties have what can sometimes seem like a crippling amount of student debt. It’s important to remind yourself that this debt is an investment in your future and that you will, eventually, pay it down. What you cannot do, at all costs, is simply ignore your student loans and not pay them back. In doing so, you risk damaging your credit score, and the lower your credit score, the more it can impact you, like if you want to rent, buy a house, take a loan, buy a car, etc. When you have a lower credit score, the interest rates charged to you will be higher.????

The best way to start is to stay organized; know how much you owe on each loan (if you have multiple loans); know exactly what is due each month, how to submit payment, etc. Ideally, before you leave school, you have an action plan in place as to how you will repay your student loans. Your budget will likely be very tight, but at the very least, you should pay the minimum amount and make additional payments if your budget allows.

Common Financial Mistake #3: Not Maximizing Retirement Contributions

When you are young and just starting out in life, retirement is a long way away. You may be inclined to defer saving for retirement because it just doesn’t seem like a priority. When it comes to retirement, time is your best asset. The more time you have, the better you can grow your money and the more goals you can fulfil. You always have the benefit of the power of compounding, essentially the act of adding interest on interest, which helps grow your wealth over time.

Most experts recommend that people set aside at least 15% of their annual earnings for retirement. If your budget doesn’t permit, you may start by putting aside 5% of your income for retirement and gradually raise this amount until you reach your desired amount. Taking advantage of whatever retirement advantages your company provides is another smart and easy way to save for retirement. Many companies offer matching retirement contributions up to a certain percentage. That’s free money and considered part of your total compensation.

Common Financial Mistake #4: Not Starting to Save

The reality is that you cannot achieve any of your financial goals, be they something as simple as buying new work clothes or something larger like a car, if you don’t save. Saving early matters but, unfortunately, many young people defer saving because the future seems so far off. Just like with your retirement savings, the sooner you start, the more you benefit from the power of compounding, which helps your money grow by earning interest on interest.

One really important component of saving is to build an emergency fund. It doesn’t need to be as large when you are first starting out, but everyone needs to have an emergency fund in the event that something unplanned happens, like losing your job or having to replace a lost or damaged phone, for example. If you don’t have money saved up, you will eventually end up in financial trouble because unexpected costs are inevitable over time. It’s best to prepare now and avoid a higher-cost alternative, like having to use your credit card or taking out a loan.

Common Financial Mistake #5: Not Having Insurance

Another common financial mistake that younger people often make is that they delay getting insurance, again because they are healthy and don’t believe they need it.?For most young people, getting insurance is not top of mind, The reality is that young people are not invincible, and the last thing you need in life right now is unplanned medical debt, for example. There are many different types of insurance that protect you from the worst-case scenario, from life to car, house, dental, vision, disability, pet insurance, and so much more.?Remember that insurance needs to be purchased BEFORE you need it! You are always better off to be safe than sorry.

Theoretically, your best premiums and lowest monthly payments are when you are healthiest. As with anything you purchase, do your research to find the best policy with the lowest premium. You can build monthly insurance payments into your budget so that you are prepared for the unexpected.

There are numerous financial traps that we will all face over our lifetimes. One might argue that you’re much more susceptible to these traps when you are younger. Your twenties are an exciting time of your life and, when money is involved, you want to make as few mistakes as possible, so being money-wise now will pay off in the future. Indeed, the more you know, the more prepared you will be, so educate yourself as much as you can now.

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