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If you’re like me, you made some financial mistakes in your 20s. Looking back, I would have done a few things quite differently. I was overconfident in my earning power and didn’t concentrate enough on saving money. I can’t even imagine how much further along I would be today if I had gotten my finances in order in my 20s, instead of my 30s. Without further ado, here is a list of the 17 money mistakes to avoid in your 20s.
1. Dating/Marrying the Wrong People
Even in your 20s when you may just be “casually dating”, it is important to seek people who share your values and who you can see yourself building a future with. I’ve met so many couples who did not discuss money within their relationship until their engagement. My wife and I had conversations surrounding finances during the first month that we started dating. I didn’t want to waste her time if she and I were not financially compatible.
Important topics to discuss include: how much debt you have accumulated, your financial goals, and even specifically, your retirement goals. You don’t want to get too serious with someone without knowing their financial situation and value system, as your judgment may become clouded as you fall in love.
Related Article: The Biggest Financial Benefit to Getting Married
2. Thinking You Don’t Need To Budget
You’re an adult now. It’s time to set up a monthly budget so that you can free yourself up from living paycheck to paycheck. A budget is not looking at your checking account and confirming that your balance is above zero so that you can spend money. With a well-planned budget, you can set up financial goals for yourself and avoid slipping into debt by spending more than you earn.
I advocate for the zero-based budget. This budget assigns every dollar to a specific budget category. At the end of the month, there should not be any money unaccounted for.
I have witnessed firsthand that budgeting leads to financial freedom. Meanwhile, lack of budgeting leads to financial misery.
Personal Capital is a great tool to utilize to track your income and expenses. Look into signing up if you haven’t already.
Related Article: Why You Need a Budget Badly
3. Failing To Save For Emergencies
At some point in your 20s, an emergency will probably occur. Whether it is car repairs or medical bills, 44% of Americans do not have $400 readily available in cash to pay for an emergency.
But it isn’t only 20-somethings who can’t afford to pay for emergencies. As you can see in the graph below, even baby boomers struggle to save for emergencies.
The problem with the $400 figure is that the typical emergency, according to Pew Charitable Trusts, is $2,000, or 5 times $400.
Protect yourself against emergencies. Aim to save up 3-6 months worth of expenses. Why 3-6 months worth? On average, a person is out of work for 3 months, but during the Great Recession, that figure rose to 6 months. Don’t fall into debt because you don’t have a fully funded emergency fund.
Related Article: Why You Need an Emergency Fund
4. Failing To Understand Your Relationship with Money
If personal finance was only about basic addition and subtraction, we probably wouldn’t make as many financial mistakes. Unfortunately, our relationship with money is often emotional. Too often, we spend with our heart, instead of our head. That’s why we convince ourselves that we need certain items, when in reality, it is merely an intense want.
Are you a spender or a saver? What are the things that cause you to unnecessarily spend? These are important things to understand in your 20s. If you choose to tackle this later in life, that may be a costly mistake.
5. Paying For Crossfit While Forgoing Health Insurance
Unfortunately, this is a real world example that I have witnessed first hand. A friend of mine chose to forgo health insurance and instead, pay for his CrossFit membership. He was convinced that CrossFit would keep him healthy.
In my 20s, I considered forgoing health insurance too. After all, nothing bad happens to 20-somethings, right? Definitely not true. I am beyond thankful that I did opt for health insurance though, as I was in a horrific car accident in my 20s.
If I didn’t have health insurance, my financial journey could have gone much differently. I probably would have owed thousands of dollars in medical bills and then would have started my early 20s with debt. After my friend saw what happened to me, he wised up and got health insurance as well.
6. Allowing Your Bills to Pile Up
If you do not automate your bills, you may be setting yourself up for failure. Without automation, you are much more likely to owe late fees, higher interest, and potentially negative consequences to your credit score, if you forget to pay a bill or two.
On top of that, if you forget to pay your bill and don’t respond to the late notices, you may be handed over to collection agencies. Automate all of the bills that you can so that you don’t risk forgetting to pay your bills on time.
7. Foregoing Renter’s Insurance
One of the biggest mistakes that I see with 20-somethings is that they assume that the landlord’s homeowners insurance policy will protect them if something happens to the property that they rent from. Unfortunately, this is not true.
For example, let’s say the house you are living in burned down with all of your possessions. The homeowners policy would only cover the losses for the homeowner. It would not cover anything for the renter.
This is why renters insurance is so important.
Renters insurance will help you replace items that have been stolen or damaged and even help with your medical, if someone suffers an injury inside your home. In addition, if the apartment that you are staying in is so damaged that it becomes uninhabitable during repairs, the insurance policy should pay for temporary living arrangements.
For the cost of $15-$25 a month, renters insurance is incredibly affordable. Plus, think about how much you would have to pay out-of-pocket if a fire destroyed everything you owned and you did not have renters insurance. Between your television, furniture, computer and even a temporary hotel stay, your costs could be through the roof. You can’t afford not to have protection on your rental unit.
8. Not Planning Out Your Housing Strategy
When I first graduated from college, I moved in with my parents. I was incredibly fortunate, but many of my friends were not. Many were tired of living in run-down apartments and were ready to show the world that they were adults.
In addition, some of them decided that they didn’t want to live with roommates anymore. That meant that they had to pay nearly 50% of their paycheck to live in the trendiest areas. They also had to pay more for utilities, including parking and Internet, overextending themselves.
However, eventually, some gave in and found roommates. Some also moved to more affordable areas so they weren’t over-exerting themselves as much financially. If these people had thought out their housing strategy, they may have decided to stay in a cheaper housing situation for longer, save some additional money, and then upgrade later on. Instead, they did the opposite.
9. Thinking You’ll Pay Credit Card Debt Later
It is too easy to charge everything on a credit card, especially in college when you assume that shortly afterwards you’ll have a job to cover those payments. Honestly, that is a dangerous mentality. It is a bad habit to spend more than your earn, and that habit is hard to break.
This is why so many people are deep into credit card debt today. They want what they want immediately. Nevermind that the $1,000 of credit card debt can quickly escalate to $10,000.
Instead of living for today, live for tomorrow. Think about the lifestyle that you want to maintain later in life and make sure that your current habits line up with that. If not, then start making adjustments. Cut your expenses anyway that you can. Whether that’s living at home, getting a roommate, or cutting your food bill, focus on paying off your credit card as quickly as possible.
Related Article: How Credit Card Companies Make Money
10. Taking on Debt to Buy a Car
You don’t need a fancy car in your 20s (or ever). Cars are depreciating assets that lose money each every year that you own them. I had a couple of roommates that bought top-of-the-line cars in their 20s. I’m talking BMWs, Jeeps and Lexuses. The problem was these cars put them into debt and actually set them back financially. None of those roommates were able to purchase a home as quickly as they had hoped to.
When they finally sold these cars, they lost over 50% of the value that they paid, which was tens of thousands of dollars. Instead of a luxury car, seek a reliable one. Then, you can invest the difference and enjoy those returns later in life.
Related Article: The Best Tips for Buying a Used Car
11. Catching the Travel Bug While Paying On Credit
Don’t get me wrong. I am not against travel. I am just against traveling when you don’t have the money to pay for it.
If you are going to spend a lot of money to travel, definitely budget for it. Avoid debt as best as possible. An experience of a lifetime shouldn’t cost you in high interest rates and difficulties achieving future financial goals.
In my experience, you can find great rates when you travel to certain places off-season. That may mean September for Europe, when students are back in school, or even the April/May season before they are off on break.
You can save thousands of dollars this way. Plus, it’s a lot less crowded.
12. Not Attacking Student Loan Interest
According to Business Insider, the national student debt now totals $1.4 trillion. That breaks down to $17,126 per graduate. Take a look at the breakdown of student loan debt by state. It’s not pretty in the North and Northeast.
Many people tell me that they don’t want to pay off their student loan debt due to the tax break that they get from it. What they need to keep in mind is that you can only deduct up to $2,500 in student loan interest.
If you are single, this tax break starts to phase out at $65,000. It totally phases out at $80,000. If you are married, this tax break starts to phase out at $135,000 and totally at $165,000.
Let’s say you are in the 12% tax bracket. That means that you would pay $2,500 in interest, and in return, you would receive back $300. That hardly seems worth the break.
13. Failing to Build Good Credit
Unless you pay cash for everything, you will probably need credit for certain things. Whether that’s obtaining a job (yes some employers check your credit score when deciding to extend an offer to you), renting an apartment, or even buying a home, having a good credit score is vital to your financial journey.
Build up your credit in your 20s. This means paying your bills on time, showing that you can handle credit and be responsible. You don’t even have to make more than a couple of purchases a month. The main purpose is to demonstrate that you are able to handle the credit extended to you by your bank.
On top of that, you need to ensure that your credit report is correct. You can request a free credit report every year from the three main credit bureaus. If you haven’t already, you should be doing this in light of the Equifax breach. By doing this, you can ensure that nothing nefarious has happened, namely identity fraud.
14. Thinking You Can Save for Retirement Later
I had a friend who never wanted to save. It’s like he had a hole burning in his pocket as soon as money arrived. Whenever I asked him why he wasn’t saving for retirement, he explained that he would make more money when he got older and could save then.
What he failed to recognize is what Albert Einstein called the 8th wonder of the world. Compounding interest. In this case, time is invaluable. Even if you contribute just a small amount each paycheck into your 401(k) account, your long-term horizon, before you reach retirement, will allow for your retirement account to grow over time as compounding interest does its job.
Contribute up to the match of your employer in your 401(k) account. After that, diversify your tax risk, and contribute up to the max in your Roth IRA, which for 2018 is $5,500. Beware that the Roth IRA has phase out limits, so make sure you stay on top of the phase outs. Once you have maxed out your Roth IRA, go back and max out your 401(k) account. As of 2018, this figure is $18,500.
Related Article: How Increasing Your Savings By 1% Annually Affects Your Retirement
15. Keeping Up With the Kardashians
In my 20s, my friends liked to go out a lot. I never drank, yet I still had to pay a cover charge when we went out. Most nights weren’t even that much fun, and I usually came home reeking of smoke. I never really understood why we went out when usually had more fun hanging out at the house, which was a much cheaper alternative.
Honestly, peer pressure is why I would go out with my friends. Who wants to stay at home by themselves on a Friday or Saturday night.
While I may have not been peer pressured to drink while I was out, I did allow peer pressure to cause me to buy a sports car when I really didn’t need one. All of my roommates were driving fancy cars, and I was tired of my 10-year-old Hondas. Even though I don’t even know much about cars, I took the plunge and splurged.
In your 20s, there is a lot of pressure to project a certain image and lifestyle. In reality, most people are so self-focused, such that they actually aren’t concerned about your image or lifestyle.
16. Going to Grad School Just Because
I went to Grad School thinking that it would be my ticket out of the job that I had. However, since I didn’t have a set plan, I really had no idea what I wanted to do next. So, grad school really didn’t help me accomplish this goal. After spending over $100,000 in tuition, I wonder if grad school was really worth it. I still work at the same job that I had previously. Looking back, I question whether I would have done better if I picked up a certificate in my field of employment instead.
All that to say, have a plan in place if you decide to enroll in grad school. It’s too much money not to do so.
17. Beating Yourself Up Over Your Past Mistakes
Everyone has made a financial mistake or two. Even Dave Ramsey had to file for bankruptcy at one point.
Instead of dwelling on your mistake, learn from it. Don’t compound it. Forgive yourself and move on.
Look at any mistake that you made previously as just a temporary set back. Then, make necessary adjustments to ensure that it doesn’t happen again.
Related Article: How I Used the Stock Market To Mask My Problems
Enjoy Your 20s
This is something that you should do. Your 20s can be the best time of your life. The best part is, time is on your side. Take advantage and invest a little each month. It’ll make a huge difference later in life.