Your 20s can be a definitive decade. It’s a time when many people carve out career path, find a partner and lay the foundation for the rest of their lives. And laying a sturdy foundation is especially true when it comes to your personal finances.
There’s plenty of time to recover from money mistakes in your 20s, so it’s important to remember that a single misstep won’t affect you forever. But if you take the time to prepare (and watch out for the mistakes), you can set yourself up for success in the long run.
Some of the most common mistakes seem may simple, even obvious, while other mistakes deal with missed opportunity. Your 20s are a time to learn, grow and fully appreciate the role that money plays in your life.
These common money mistakes in your 20s are about what you should do, and what you shouldn’t do. And before you know it, you’ll be in your 30s and in better shape for the future.
Ignoring your student loans
Make as big of a dent as possible on your student loans before other expenses start piling up. If you let them linger, the balance will build over time and will seem insurmountable.
This is a high-stakes game: Student loan debt in the United States totals $1.52 trillion, and the average college debt among student loan borrowers is $32,731. That means any missed or deferred payments can add hundreds, even thousands, of dollars to your student loan debt.
Your 20s are a perfect time to take advantage of a point in your life when you’re presumably making money, but aren’t feeling the burden of other costs that come with adult life. Start chipping away at those student loans now. Your future self will thank you later.
Carrying credit card debt
Every month that you carry a balance on your credit card costs you money. And if you’re in your 20s, you likely have a relatively short credit history. That means your interest rates are higher than people who have longer, healthier credit history.
Charging things to your credit card is enticing and convenient, but if you’re unable to pay off the balance quickly you’re wasting your hard-earned money on interest. Try to limit what goes on your credit card, even if it means missing out on fun activities or changing your lifestyle.
Not creating a rainy day fund
As you get older, you learn that a big expense is always around the corner:
- The car that gets you to and from work breaks down.
- Your pet needs to see the veterinarian.
- You need to put down a deposit for a new apartment.
Nearly 40% of Americans said they would struggle to pay for an unexpected expense of $400, according to new findings from the Federal Reserve, while 12% said they would not be able to cover the expense at all.
These are expenses that could typically be covered with money from emergency savings or a rainy day fund. But without a safety net, these setbacks can lead to borrowing money, which gets expensive and can hurt your credit score.
Start by setting aside a little money every week — an amount that won’t have a major effect on your life. Even $5 a week can make a big difference over time. Put that money toward your rainy day fund and, if you can, increase the amount you’re saving after a few months. You never know when you’ll need it.
Investing poorly — or not at all
Investing may seem like an unnecessary expense — Why risk your money on something today that can’t help you until far into the future? But, so long as you do it responsibly, your 20s are a good time to invest.
Throwing money at the first opportunity you get isn’t responsible investing. Smart investing involves thoughtful calculations and analysis of your income, your current situation, your long-term goals and your comfort level when it comes to risk.
On average, millennials don’t begin investing in their retirement until they’re 36, according to a report from ValuePenguin, and only 38% of millennials currently contribute to a retirement account. But even a small amount of your paycheck — put into a 401(k) or another retirement account — has plenty of time to grow before you’re ready to retire.
Sit down with a parent or trusted adviser and figuring out what makes sense for you. A smart investment now, even if it’s a small amount, could have a large impact on your future.
Ignoring your credit score
When you’re in your 20s and learning about how to manage your money, it can be easy to make excuses when things go wrong:
- “My credit score only went down a few points.”
- “I have plenty of time to fix my credit score.”
- “My credit score doesn’t even matter that much.”
A drop in your credit score may not matter in the moment, but that three-digit number plays a major role in your ability to borrow money and how much it will cost you in the future. Your credit score is an important measurement of your financial health, and you shouldn’t ignore it.
Living above your means
No number of Instagram likes is worth being financially unstable. It’s OK to pass on that perfect, picturesque (and pricey!) outing if you can’t afford it.
FOMO spending is real: Nearly 40% of millennials said they’ve spent money they didn’t have to keep up with their friends, according to a Credit Karma survey, and two-thirds said they feel buyer’s remorse after spending more than expected in a social situation they later regret.
If you’re unsure if you can afford something, check your budget. If you don’t have a budget, create one. You can manually track your finances and calculate how much “fun money” you can afford to spend every month. There are also plenty of apps that will track it all for you and provide a full picture of your spending.
No amount of FOMO is worth the anxiety of not knowing how to pay off your credit card balance.
Money mistakes in your 20s are inevitable
One money mistake likely won’t hurt you forever. Your 20s are a time to learn, grow and find yourself — so don’t let fear of a mistake get in the way of your personal development.
These money mistakes in your 20s are common for a reason: They happen to everyone!
As long as you know what to expect — and maybe watch out for a few of the bigger traps — you can prepare in advance and minimize these common money mistakes.