Most mistakes you make will not be fatal to your finances, but some could have long-lasting consequences.
Stop Digging
If you make a financial mistake and find yourself in a hole, the first thing to do is stop digging. Seeking sound financial advice and making a budget to help you reach your goals can usually put you back on track.
Are you in your 20s and ready to take control of your life? Sidestepping these 10 mistakes can move you closer to financial freedom.
Managing finances and all the expenses that come with adulting doesn’t come naturally. Along the way, you’ll encounter plenty of pitfalls that can distract you from paying down debt and saving for your future. Here are 10 things you should avoid, so that you can take charge of your money and your financial security.
1. Not Seeing a Brighter Tomorrow
Some financial mistakes can sneak up on you, and you don’t even know there is a problem at first. When you realize your mistake, don’t feel hopeless. All financial problems can be solved with the right attitude. No matter where you are in your financial journey, you can learn to budget smarter, build (or rebuild) credit, and save up for all your life goals. And you can start today.
2. Not Investing in Yourself
Investing in yourself is not necessarily a financial decision. It is about making an effort to stay healthy, get educated, and improve your skills. With that in mind, do your research before pursuing a degree, certificate program, or even a gym membership to ensure you’ll get a good return on your investment.
3. Not Controlling Your Habits
Lifestyle can be the key to your financial health. Developing good saving and spending habits will set you up for financial success. Other lifestyle habits like drinking, smoking, ordering takeout every day, or bingeing on streaming services can be expensive and lead to financial disaster. Those habits can also take a toll on your physical, mental, and financial health. Moderation is key.
4. Not Creating a Budget
A budget is your road map to achieving all your financial goals. Wandering through life without a map leaves you subject to random forces like luck. Take control of your journey by mastering the 60-20-20 rule for budgeting your money. Allocate up to 60% of your paycheck to housing, transportation, groceries, healthcare, and other living expenses. At least 20% of your income should go into savings. The remaining 20% is your fun money. Spend it on restaurants, travel, entertainment, and gifts.
5. Not Having an Emergency Fund
No one expects to have emergencies, but then your car breaks down or you are faced with unexpected medical bills. Without some money set aside for such expenses, you might be forced to borrow money or use a credit card at high interest rates. To avoid compounding an emergency with a financial crisis, start building a financial safety net for unexpected expenses. Experts agree that you need to save at least three to six months’ worth of expenses. To build a fund, consider automatic transfers from checking to savings – set it and forget it.
6. Not Investing for Retirement
When you get your first full-time job, the last thing on your mind is retirement. Most retirees will tell you, though, that a career goes by faster than you think. You don’t want to be teetering on the brink of retirement without a significant nest egg built up. Start early and set up a tax-advantaged account like an IRA. If your employer offers a 401(k), use it. Talk to your human resources department, and make sure you’re taking advantage of all available benefits, like matching contributions.
7. Overusing Credit Cards
Credit cards offer you an opportunity to borrow money in the short term without paying interest. Think of them as a convenience, not a crutch. If used wisely, credit cards can help you build a healthy credit history. But carrying an unpaid balance can cost you big, and your credit will suffer if you don’t pay in on time. Consult your budget to see what you can afford before using a credit card to make a purchase. If you cannot pay the balance in full when the bill is due, stop using your credit card until you get it paid off.
8. Overpaying for a Car
Buying your first car is an especially satisfying feeling. It represents freedom and adulthood all wrapped in a shiny package. But don’t make it also represent your first experience in excessive debt by borrowing too much. You don’t need a fancy ride – you just need to get where you need to go. Consider buying used – and if you’re in an area with good public transportation, see if you can get by without a car at all.
9. Ignoring Insurance
Insurance protects you against the risks of life. When you are just starting out, it is hard to imagine you will ever need such a safety net, but you might. When you set up your budget, be sure to include the cost of insurance premiums. Health and renters insurance are essential expenses for everyone – and life insurance is vital if you have a family. Check to see whether your employer offers low-cost life or disability policies.
10. Letting Finances Wreck Relationships
Even the strongest bonds get strained when you add money to the mix, so don’t treat mom and dad like a bank. Develop your own financial independence by learning, budgeting, and saving. You don’t want to be the child who calls your parents only when you need money. The one person you don’t want to avoid money talk with is your significant other. Friction can arise in a relationship if you are not both working together toward common financial goals.
If You Can’t Avoid Mistakes, Learn From Them Life lessons will always include some trial-and-error, even with financial decisions. Most mistakes you make will not be fatal, but some could have long-lasting consequences. Position yourself for accelerated growth by avoiding these big financial blunders.
