Every so often, do you look back on your life and think, “Wow, how could I have been so stupid?!” Yeah, me too. We’re all guilty of making mistakes.
Sometimes, the worst mistakes we can make involve money. And most of us know that our 20s are regarded as a time to make plenty of mistakes (and learn from them early on).
That doesn’t mean you shouldn’t be aware of major financial mistakes to avoid in your 20s, though. While being young means having more time to recover from them, we’ll still be better off if we experience success in our 20s instead. The sooner we can build a strong financial foundation, the better!
How to Steer Clear of Financial Mistakes in Your 20s
Even though I’m now in my mid-20s, I remember turning 20 and knowing next to nothing about credit scores, student loan debt, how to use a credit card properly, or how to pay off debt effectively.
That’s why I wanted to review a few financial mistakes that can easily be avoided in your 20s.
For those of you out there who aren’t in your 20s, these could very well apply to you, too!
1. Don’t Buy a Brand New Car
This is one of the more popular financial mistakes recent college grads make. What better way to celebrate your first step into adulthood (or your first job) than buying a brand spanking new car?
You’ll be the envy of all your coworkers, you get to drive around in style, and you’ll impress your friends.
Or will you?
At my second job out of college, 10 out of the 15 people that worked in our office had new cars. Some were luxury brands, some weren’t, and most were leased.
I won’t lie – initially, I was a bit jealous. I had one of the oldest cars in the parking lot, and I felt a bit out of place.
One day, a discussion of car payments came up. I found out most of my coworkers were paying between $250-$450 per month (or more). They thought these were decent amounts.
After that, I was pretty happy driving around in my older car, as not having a car payment sounded a lot better to me.
Take the responsible approach when buying a car. Save up as much as possible, and buy a reliable used car. If you have to finance, make sure you can actually afford the payments! Don’t destroy your budget for something that just needs to get you from point A to point B.
It’s been said before, but it bears repeating: new cars lose a lot of their value as soon as you put your foot on the accelerator. Don’t buy into the hype.
2. Don’t Rush Into Home Ownership
With the low interest rates that have been hanging around for the past few years, many of my friends and coworkers have been talking about buying a home, and in some cases, they’ve followed through on it.
That’s fine, so long as you know it’s the right decision for you.
Don’t go into the process blindly, though. You should have something saved up (preferably 20 percent of the purchase price of the home), and you should know exactly how much you can afford. (Hint: it’s probably not as much as what the banks will approve you for.)
Home ownership isn’t something you should rush into. While owning a home sounds nice (you won’t have to deal with lousy neighbors or property managers who couldn’t care less about their tenants), carefully consider all the hidden costs that come along with it.
Renting provides more flexibility, which can be great to have in your 20s if you want to move around for career opportunities.
3. Don’t Wait Forever to Pay Off Debt
As widespread as debt is, that doesn’t mean it’s normal to have it, or that it’s good to carry so many balances.
If you’re in any kind of debt, you should analyze your situation and figure out how to get it paid off, especially if you have consumer debt at interest rates over 15 percent.
Why should you attack debt? High interest rates will cost you dearly, and debt is usually a chain that will tie to you your paycheck. Most people in their 20s value flexibility, but debt gives you the exact opposite.
When you pay on credit and don’t actually have the money for the purchase, you’re paying more than the item originally cost. It’s a silly mistake that can be avoided with proper planning and budgeting.
4. Don’t Procrastinate on Saving for Retirement
If your employer offers a 401(k), please take advantage of it. Your future self will thank you for it. This is especially true if they offer matching contributions. That’s free money, and I don’t think most people in their 20s understand that.
If you’re unsure of how your 401(k) works (or if you even have one), just ask. It’s one of the most important keys to saving for retirement, and you should know how it works.
If you don’t have a 401(k) available to you (sadly, I didn’t!), look into opening an IRA. The annual contribution limit is $5,500. Broken up over 12 months, you’d need to contribute $458 per month to max it out. That’s not accounting for any windfalls you might get, either (bonuses, birthday/holiday money, tax refund, etc.).
If you’re in a decent financial situation, then it’s smart to start investing early, as compound interest is on your side. If you’re not sure where to open an IRA, check out John’s list of online brokerages as you can find a good one there.
5. Don’t Give Into Lifestyle Inflation Without Thinking
Most of the time, lifestyle inflation is inevitable. Let’s be honest, living like a broke college student for the rest of your life probably doesn’t sound too appealing.
But that doesn’t mean you should accept lifestyle inflation without a challenge.
This is how I think of it: when we choose to “upgrade” in life and incur an extra monthly or annual payment, we’re making retirement more expensive.
If we get used to a certain lifestyle now, we’re not going to be very happy about giving it up later, even if we can’t afford it.
Saving can be a challenge for some people, and by avoiding lifestyle inflation now, you’ll make retirement less expensive and easier to reach.
This is even more important for millennials, as life expectancy is increasing. That means our retirement will likely be longer than that of previous generations. Unfortunately, that also means we’re going to need more money to cover that increased time period.
When contemplating bigger purchases, keep in mind how it will impact your finances in the future.
Staying on track financially in your 20s is a challenge, but it’s not impossible. Follow these tips and you’ll be on your way to success.
What common financial mistakes do you see people in their 20s making? What financial mistakes were you guilty of making in your 20s? What are you having to do now from a financial perspective that you wish you would have done earlier?