5 Financial Mistakes to Avoid in Your 20s

Updated January 22, 2020

For many people in their twenties, learning experiences and financial decisions are plentiful. The transition from college to the professional world takes place during this time, and graduates learn how to support themselves without the help of their parents. It is an exciting time for 20-somethings to be financially independent, but it can also be daunting. When it comes to money, missteps made in younger years can affect people for the rest of their lives. Unfortunately, some 20-somethings do not realize the financial mistakes they make until much later on in life. Here are five of the most common financial mistakes people in their twenties make:

Not Setting Financial Goals

Many young professionals are often caught up in the excitement of receiving a sizable paycheck, but they fail to make a plan for what they are going to do with it. Not setting short-term and long-term financial goals can lead to frivolous spending without limits, which can make it more difficult to save money. Think about where you see yourself in the future. When would you like to purchase a car or home? How much do you want to have in savings by a certain point? Knowing where you want to go and coming up with a plan for your money can help you with budgeting as well. 

Related >> How to Set Financial Goals

Neglecting to Budget

Writing and sticking to a budget is crucial for everyone, but this is especially true for young adults in the first phases of their financial journey. Without a budget, people might find themselves spending more than they should or even living paycheck to paycheck. Tracking your spending and being cognizant of where your money goes might lead to a realization that you are spending more than needed in unnecessary categories. Budgeting can help with that — it gives you boundaries and limits on what you can spend and where, freeing up more money to save, invest, pay off debt, or get you another step closer to achieving financial goals.

Failing to Establish Good Credit

This is another big item. In addition to existing education loan debt, 20-somethings are prone to piling on more debt in the form of credit cards. Credit cards make it easy to purchase things without immediately receiving a bill, so many people fail to consider the repercussions. Often, they will carry a balance from month to month by only paying the minimum amount. Do not make this mistake — credit card debt can be crippling to your financial health and can negatively affect your credit score, keeping you from getting the best rates on future purchases. Instead, use your credit card(s) responsibly by keeping your credit utilization ratio below 30 percent and paying off the balance each month. That way, when it comes time to buy a home or new car, you will be more likely to get the best rates, potentially saving you money on interest in the long run.

Foregoing an Emergency Fund

One of the first goals to set when starting the professional chapter of life is establishing a solid emergency fund. Financial experts recommend saving up at least three to six months’ worth of living expenses in case of emergencies. Many people in their twenties tell themselves that they can simply use their credit card for an emergency, or that emergencies will not happen to them at all. However, life is unpredictable — you never know when your car might break down, you take an unexpected trip to the emergency room, or your company needs to lay off some of its employees. It is better to be prepared for anything that could happen than to be blindsided by an emergency and not have the money to cover it.

Waiting to Save for Retirement

It can be very easy to put off saving for retirement. After all, you are in the early years of your life and career, and retirement is a distant thought. However, the earlier you get started, the better because that means that there are more years between now and retirement for interest to compound. If your employer offers a 401(k) plan, you will want to start contributing as soon as possible. According to a recent survey, 39 percent of retirees said they regretted not saving for retirement sooner. Try not to be part of that statistic and start saving immediately.

Start Out on the Right Foot

As a young person with the world at your fingertips and a paycheck in hand, making damaging financial decisions is easy — and the moves you make now can impact your life for years to come. To start out your finances on the right foot and enjoy financial success in the future, educate yourself on the financial mistakes people make at this age and vow to avoid them. Set goals for yourself, create an effective budget and stick to it, save up for emergencies, build good credit, and start saving now for retirement — you will be thankful you did.

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