Finance

5 Financial Mistakes To Avoid In Your 20s

Your 20s — the decade of adulting. For many of us, this means starting a career, furthering our education (or trying a bunch of different things in search of said career or education).There are many common money mistakes that most young adults make in today's blog post we want to point out some of the most crucial moves that can hinder your financial goals.

January 10, 2022

5 Financial Mistakes To Avoid In Your 20s

Your 20s — the decade of adulting.  For many of us, this means starting a career, furthering our education (or trying a bunch of different things in search of said career or education), finding our own primary care physicians, feeling pretty *adulty* with our brand new apartment rental or just kicking back with our buddies on a Friday night watching the Golden State Warriors or Bucks, and (of course) ramping up our financial plan and goals. 

There's a lot to figure out in your 20s as you transition to independence, but we'd argue that one of your top goals should be money management. The educational system does not always do a good job of training young adults to be responsible with their money (and frankly, without the right teacher, finance can be pretty puzzling to some.)

There are many common money mistakes that most young adults make in today's blog post we want to point out some of the most crucial moves that can hinder your financial goals.

Here are five money mistakes to avoid in your 20s:

1. Not Creating a Budget For Yourself

Creating a budget boils down to being conscious of your spending habits. If you don't keep track of how much money comes in and goes out, it's very easy to overspend. To help you allocate your money more intentionally toward your goals, we suggest following the 50/30/20 rule.

To begin, make a list of all of your sources of income so that you have a solid picture of what's coming in the door. Then you can divide your spending as follows:

50% of your take-home pay to needs (bills, food, transportation, etc.)
30% of your take-home pay goes to wants (ski pass, concert tickets, travel, etc.)
20% of your take-home pay to your future (debt payments above minimums, saving, and investing)

You may need to go above 50% on the "needs" bucket, especially in your 20s, when you have added getting-started-adulting costs like a work wardrobe, possibly a car, and deposits on housing (or rent in the city you love), but your pay is also in getting-started mode. That's fine; it's adaptable. You can borrow the difference from the 30% in the "wants" bucket if you can for the time being. 

Sometimes it's easier said than done - however, focusing on that entire 20% to Future You and going for it as hard as you can will help you reach your goals faster. Start with whatever you have today and strive to increase it by a percent or two per year or so. Bonuses, raises, and tax refunds are ideal for this. 

If you need help with creating the perfect budget for you, snag a FREE Budget template here.

2. Not Setting Clear Financial Goals

What do you see yourself doing in the future? Are you looking for a house with a yard for your dog? To be debt-free from student loans? Want to take a trip across Europe for your 10th wedding anniversary? You'll need financial goals to do any of these things. It's one thing to set goals. It's another thing entirely to turn those dreams into reality. It's all too easy to fall into the mindset of "I have time" or "It's too early to think about that." However, we believe that you are undervaluing yourself by adopting this attitude. 

We suggest taking these steps: 

  1. Categorize each financial goal as short-, mid- or long-term.
  2. Set a target date.
  3. Prioritize each financial goal: critical, need, or want.
  4. Know how much you have vs. what you still need to save.

This can be intimidating for some, but with the right financial advisor on your side, it can be a smooth and stress-free process.

3. Taking on Credit Card Debt

We can agree that having a few credit cards can help you improve your credit score, but having too many can lead to a cycle of compounding interest and debt. You'll be buried in the snowball effect if you can't pay off the amount you spend each month. Using credit cards to finance vacations or a new wardrobe is an unhealthy financial habit. Carrying a load on many credit cards can quickly spiral out of control, whether used to pay for ordinary expenses or to support a lifestyle beyond one's means. Making a few small purchases on a single credit card and paying off the bill in full each month is a better way to ease into using credit. Trust us. 

Why does credit card debt hurt so much?

Because interest rates are extremely high - the average in the United States is currently 18 percent. The interest rates on most other kinds of debt, such as student loans and personal loans, aren't quite as high. That's why we usually advise merely paying the minimum on those while you concentrate on paying off your credit card debt first. When you make minimum payments, the money is applied first to any unpaid interest. Then there's the possibility of being charged interest on your unpaid interest. It compounds, to put it another way. As a result, your minimum payments may not make much of a difference in the underlying debt – if any at all.

For example, suppose Mia has a $9,300 credit card debt with a 17.8% interest rate. The minimum payment is 3% of the balance or $25, whichever is greater, according to her repayment schedule (pretty typical). If Mia made only minimum payments, it would take over 17 years to pay off her $9,300 balance. And she’d pay $8,600 in interest. Yes, you read that correctly: Mia will have paid nearly twice as much as she owed in the first place when it's all said and done. For 17 years. (Yikes) 

4. Living Beyond Your Means

Simply put, ”living above your means” means that you are spending more money than you are bringing in. You can fall into this trap by using credit cards, loans, and poor savings to pay for your expenses. This method however is not sustainable, and your expenses will eventually catch up to you.

Here are some signs that you’re living a lifestyle you simply can’t afford:
  • You live paycheck to paycheck.
  • Your credit score has dropped.
  • You’ve stopped your retirement contributions.
  • Your savings account isn’t growing.
  • You’ve been charged an overdraft fee more than once for the year.

5. Not Saving For Retirement

You may feel that now is not the time to worry about retirement. But keep in mind that you won't be able to work forever, so it's a good idea to start saving for retirement as soon as possible.

The earlier you start investing in a retirement fund, the easier it will be to save enough money to retire comfortably, thanks to compounding interest (when the interest you earn starts earning interest).

You don’t have to contribute a lot–even just putting aside a small amount of each paycheck into a 401(k) or IRA each month can help you build wealth over time.

The best time to start? Today. Your golden years will thank you.

We’re here to help you with all of that. Click here to get started.

Your Money. Your Life.

Vincere helps you live your ideal lifestyle by providing financial planning and investment advice that helps you pursue your passion and achieve a "Work Optional" Lifestyle.

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