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Most young adults spend their 20s graduating from college, starting a career, getting married, and navigating the complexities of life in the “real world.” With this new independence, it may be the first time they have had to handle their finances alone—making it crucial to understand the common mistakes to avoid during this pivotal stage.
The financial decisions you make when you’re young can be vital to your financial stability in your 30s, 40s, and so on. These 15 bits of wisdom are some advice I wish someone had given me.
It’s tempting to start splurging after graduating college and making money at your new job. But you might be better off living like a poor college student until you’re comfortable creating a budget.
Too many college grads start spending money frivolously on things they don’t need. Even though it sounds nice to furnish your apartment immediately, saving money and slowly accumulating furniture and household items might be a better solution. You’re better off having a savings account than the furniture you thought you liked when you were 20.
2. Not Tracking Your Money
Keeping track of your bank account balance is a skill that many youngsters seem to lack. Excessive spending is an easy way to drain your bank accounts altogether. How can you accurately track your monthly spending without checking in on your balances?
Nowadays, keeping a monthly budget with online apps and banking resources is easy. Keeping a detailed budget and tracking your spending are vital resources for your later years.
3. Not Setting Financial Goals
It’s never too early to get a head start on your retirement funds. I wish someone had taken me aside and explained the importance of investing in the future.
Instead of going out a few nights a week, you could put that money away in a high-interest-yielding account. Consistently doing that throughout your 20s can give you a big lift when you hit your 30s, setting you up for retirement.
4. Credit Card Dependence
Healthy credit card usage should be taught in high school. Period. Shockingly, so many people don’t understand how credit cards can damage a person’s credit score and set them behind in their financial future.
Presenting a credit card at a restaurant or linking it to your Amazon account for purchases is easy. The problem is that those charges add up. If you’re not responsible enough to pay off the monthly balance, you could face hefty interest rates that can follow you for years.
5. Grow a Savings Account
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Growing a savings account is a great way to cover emergency expenses. These can include car repairs, medical bills, or home repairs. Instead of using your credit card for these expenses, you’ll be prepared by having an emergency fund.
Financial experts agree you should have enough money saved for the unlikely event you’re out of work for six months. Keep adding to your savings account until you feel comfortable with your balance. This financial padding will help if you’re between jobs or paying off an unexpected bill.
6. Ignoring Debt
In your early 20s, it might seem like you have a lifetime to pay off your student loans or credit card debt. The truth is that those interest rates can make it nearly impossible to make minimum payments and get out of debt quickly.
The best advice I never received was to pay as much as you can afford on your student loans. The more you can put towards your principal, the quicker you will be free from that loan and its high interest rates.
7. Paying the Wrong Debts First
Many young adults need clarification about which debt they should pay off first. Should they focus on their student loans, credit cards, mortgages, or car payments? Financial experts will tell you to pay off “bad” or whatever debt is, not boosting your financial situation.
What does that mean exactly? It means you should focus on credit card debt or car loans. These usually do not help your investment accounts and should be paid off as soon as possible.
8. Ignoring Your Credit Score
Like your debt, your credit score will follow you for the rest of your life and severely impact your financial future. Credit score monitoring should be a priority as soon as you become a legal adult.
The best practices to keep a healthy credit score include paying bills on time, maintaining low balances, limiting your accounts, and monitoring your reports. It’s much easier to maintain a good score than to improve a lower score when you are older.
9. Buying an Expensive Car
When you graduate from college and start making real money for the first time, you might be tempted to splurge on a fancy new car. While that sounds fun, you need to make sure you can afford the payments and get a low annual percentage rate. Without a good credit history, those APRs can get pretty high.
Buying a practical, affordable car might not be as cool as a flashy sports car, but it’s a smart move to prevent you from going into debt over a vehicle. Plus, you’ll save money on insurance and yearly license plate fees.
10. Postponing Retirement Savings
Just like you think you have a lifetime to pay off your debt, you might think starting your retirement funds in your 20s is way too early. Sure, you might want to spend your extra cash on a new pair of shoes or a night on the town, but the truth is, you’ll wish you had put some of that extra money away when you hit your 40s.
New professionals should take advantage of employer 401(k) contributions. Even small monthly savings can add up over time and set you up for success in the second half of your life.
11. Not Having Renter’s Insurance
Renter’s insurance premiums can be as little as $15 monthly. That’s not much, and it protects you from theft, fire, or flood.
Do you want to be on the hook for thousands of dollars in damages due to an accident? Get the renter’s insurance. It might be the best money you spend all month.
12. Not Having Health Insurance
I can understand not wanting to spend the money on insurance for my apartment, but not insuring my body seems silly. You might feel invincible in your 20s, but you should not skimp on health insurance.
Health insurance is designed to keep you from going into debt if the unforeseen should happen. God forbid you get into an accident or face a medical scare. In that case, health insurance is there to care for you financially and medically. If your job offers health benefits, take them. You want to avoid being left with a medical bill when you least expect it.
13. Not Discussing Finances With Your Partner
If you’re in a long-term relationship, it’s important to be on the same page regarding your finances. Similar financial habits can relieve stress when achieving your financial goals.
Before you make significant decisions together, you should sit down and be honest with each other about your income, debt, credit scores, financial goals, and spending habits. You might also want to build a combined budget you can follow for shared expenses like rent and utility bills.
14. Going Into Debt for a Wedding
Planning your wedding might be one of the most exciting moments of your life. With all that excitement, it’s easy to go overboard and rack up some big expenses.
You might be surprised how much even a modest wedding can cost once you total all the expenses. The prices for wedding dresses, catering, flowers, DJs, photographers, and venue can spiral out of control, leaving you with a massive bill. If you’re paying for the wedding yourself, you could put yourself in the hole as you start your life with your partner.
15. Starting a Family Without a Financial Plan
Starting a family can be a dream come true for welcoming parents. While a child is a blessing, it also comes with plenty of financial responsibility. Baby supplies can add up quickly, so you must alter your budgets and spending to pay for these new expenditures.
I’m not trying to discourage couples from having kids. I just want future parents to be prepared for how expensive it is to raise a child. It costs about $18,000 a year per child. That’s a huge commitment, and it’s essential to make sure you are prepared.
16. Lavish Vacations
Young adults should take advantage of their ability to travel. My best advice is to travel as cheap and light as possible. Take advantage of hostels and work-for-stay programs. They’re great ways to travel frugally.
Save the luxury hotels and resorts for when you’re older and more stable. Trust me, you won’t enjoy staying in a hostel in your 40s as much as you will in your 20s.
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