In your twenties, it’s easy to feel confident. After all, you’re less dependent on your parents, earning an income, and finally getting to live life on your terms. But it’s not always smooth sailing from the beginning. This is an age when many people make some of their biggest (and costliest) financial mistakes. Luckily, you can avoid making them if you know what to watch for and take steps to manage your finances responsibly.
Here are a few of the most common (and costly) money mistakes people make in their 20s and what you need to do to avoid making them yourself:
1. Living Beyond Your Means
If you’re not keeping track of how much money you’re earning and spending each month, it’s easy to spend too much. Good financial management often starts with setting a realistic budget. The 50/30/20 rule is a great place to start.
Set aside 50% of your pre-tax earnings for necessities, like rent, food, and the minimum payments on loans and credit cards. Put 30% of your paycheck toward things you want, like that sweet new phone or a subscription to a streaming service. Deposit 20% of your paycheck into a savings account each month (or put it toward paying off extra debt like student loan balances).
This plan may stop you from buying everything you want immediately, but hopefully it will also prevent you from falling behind on your bills!
2. Not Saving for the Future
A recent poll found 25% of Americans have absolutely no emergency savings. Not setting money aside means you risk being unable to pay bills, make rent, or buy food if you lose your job or get your hours cut.
It’s best to save at least three to six months’ worth of living expenses for emergencies and the easiest way to do that is to open a savings account. You’ll be less tempted to use that money if it’s not in your checking account. Plus, you’ll earn dividends on the money you save. It might not be a ton, but it will help grow your savings on autopilot.
3. Relying Too Much on Credit Cards
Credit cards are great for their convenience and security. But if you’re using them to spend money you don’t have, you’re headed for trouble. Even if you make your minimum payments each month, interest can pile up fast, especially if you are using high-interest credit cards. Before you know it, you may have racked up thousands of dollars in debt.
You may be able to lower the cost of existing credit card debt and pay it off faster by transferring high-interest balances to a low-interest card. Then, make paying more than the minimum payment a part of your monthly budget and create a schedule to help yourself pay it all off.
4. Going Uninsured
By law, everyone is required to have health insurance and car owners are required to have auto insurance, so not having these types of insurance can open you up to financial and other penalties. It can also leave you on the hook for many thousands of dollars in an emergency.
You can stay on your parents’ health insurance plan until you’re 26. After that, you’ll want to enroll in your employer’s health insurance plan if they offer one. If they don’t have one or you’re self-employed, you can purchase insurance through the Marketplace. Don’t worry – the government provides financial assistance to help cover the cost of your premiums if they’re too high for your income level.
5. Waiting to Save for Retirement
When retirement is decades away, it’s easy to put off saving for it. But that’s one of the biggest financial mistakes you can make. Experience has shown that people who started building their retirement savings in their twenties saw vastly greater long-term growth than those who waited until later in life to start saving.
Many employers provide 401(k) retirement accounts, and some will even match the money you contribute up to a certain amount. Don’t leave money on the table – always contribute enough to get the full company match if there is one. If your employer doesn’t offer a retirement plan, consider opening an IRA.
Put these personal finance tips to work in your twenties, and you’ll be well on your way!