Avoid These 8 Common Financial Mistakes In Your Twenties
Let’s talk about some of the most common financial mistakes people in their twenties make and how to avoid them.
The truth is, though you might still be finding yourself in your twenties, financial decisions have already found you… and they’ll stay with you for your entire life. So let’s talk about some of the most common financial mistakes people in their twenties make and how to avoid them.
Mistake #1: Taking a Reactive Approach to Finances
Ultimately, every penny matters. Knowing this at the start of your 20s ensures you’ll possess more mindful spending habits. Spending money without a plan could put you back years. Which is why it’s best to look at money management as a proactive effort (i.e., having a plan and purpose for every dollar you make) rather than a reactive one (i.e., not spending money because you realize you’ve already overspent). Get used to the habit of spending & saving money with goals in mind rather than limiting your wallet due to previously unplanned spending.
Mistake #2: Living Beyond Your Means
In your 20s, the excitement of life can sometimes overshadow the importance of making sustainable lifestyle choices, potentially resulting in unnecessary debt. It's crucial to remain mindful of your spending habits and avoid making large, unnecessary purchases with a credit card unless you already have the funds available to pay it off.
Budget, budget, budget. Be careful to follow the 50/30/20 rule—a rule designed to help budgeters visualize the flow of income-driven expenses based on three categories—needs, wants, and savings/debt. With this rule, you’d spend 50% of your income on needs, 30% of income on wants, and 20% of income on saving or paying down debt.
Mistake #3: Neglecting Emergency Savings
“What ifs” for the future easily get ignored when we’re just starting out. And though we don’t want to stress excessively over what might happen, it’s still important to be prepared. Keeping extra money put aside for emergencies is the perfect solution for being too stressed and staying prepared for whatever obstacles in life hurtle at you unexpectedly. Emergency funds promise financial security in unexpected situations. So if you don’t know where to start, check out these FREE Banzai resources:
Mistake #4: Ignoring Student Loans
There’s no shame in taking out loans to get an education, just remember to be smart about it: Understand student loan terms and repayment options. For example, there are multiple types of loans with different types of interest rates, and not understanding this could lead to paying back far more than you bargained for. Be sure to research the difference between subsidized and unsubsidized loans and even consider the option of supplementing with scholarships if it’s not too late.
Though it’s true some loans (i.e., subsidized loans) don’t start accruing interest until after graduation, others (i.e., unsubsidized loans) start accruing interest the second they’re disbursed. And don’t underestimate the impact deferred payments and interest accrual have on your finances over time. If you need to start the student loan payoff process, check out Banzai’s free-to-use Student Loan Payoff Calculator.
Mistake #5: Failing to Plan for Retirement
Have you been neglecting your future self? Retirement funds grow exponentially over time, that means the earlier you start, the more you’ll get. Just imagine how much money you could be stealing from a sixty-year-old-you if you don’t start saving for retirement now. Treat yourself by making retirement savings a priority and relish in the benefits that come from sustained saving over a thirty-year period. Familiarize yourself today with the different retirement saving options such as a 401(k) and IRA.
Mistake #6: Overlooking Insurance Needs
Insuring your health, living space, car, etc., is a need, not a want. Doing so manages risk and protects your assets when disaster comes a knockin’. This is why it’s best to familiarize yourself with and purchase different types of insurance now. Trust me, you’ll be thankful for insurance when it pays out for damaged property, lost or stolen items, or unexpected health expenses.
Mistake #7: Not Building Credit Responsibly
So many young adults lose sight of what credit actually is: borrowed money. Borrowing outside of your means can cost your future self a lot of money. It’s best to take it slow when improving or building credit. The best way to start building credit early is to…
- Establish a good credit history
- Find a great beginner credit card, one with a lower limit to help you stay on track with paying back a debt that’s not too overwhelming
- Make on-time payments and avoid high credit utilization
Mistake #8: Ignoring Financial Education
Don’t shirk on any opportunity to educate yourself on the ways of a financial guru. Understanding finances is the quickest way to finding fulfillment in your everyday life. Look for resources that teach personal finance and make and keep goals as your knowledge of it increases. And if you can find a program that teaches finances for free (like Banzai), all the better!
It’s important to be proactive in financial planning in your 20s. Don’t let money control you, use it to control your life. Secure your financial future by staying positive, pushing forward, and working through this exciting phase with an eye on your finances and a plan to reach your goals.