Finance8 common financial mistakes to avoid during early adulthood

8 common financial mistakes to avoid during early adulthood

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20s are the time when most people start working and earning full-time. This access to larger amounts of money often leads to splurges and other financial mistakes, which can turn into costly habits later in life. Learning to use money wisely can help one reduce unnecessary expenses, diversify their income, and balance their obligations with their short- and long-term financial goals to create a more stable future for themselves and their families.

8 common financial mistakes to avoid during 20s

1. Signing up for too many credit cards

Having a few credit cards can help individuals streamline their purchases, earn rewards, and improve their credit scores. That being said, signing up for too many can lead to an unending cycle of debt, worsened by high interest rates.

While credit cards offer the comfort of making payments everywhere, this ease of use can lead to bills piling up. Instead of swiping the card everywhere, try to carry exact change for small purchases or use a debit card to make direct purchases within one’s means.

2. Accumulating unnecessary debt

For most people in their 20s, debt is an unfortunate reality due to mortgages, education loans, and other payments. The trick is to differentiate between good and bad debt. Good debt refers to debt that ultimately improves an individual’s situation (such as a personal investment in education or property ownership). In contrast, bad debt worsens their situation (like expensive personal and high-interest loans/expenses).

If one is stuck in this cycle of debt payments, following the avalanche method may be useful. Here, one starts by paying off one’s debt with the highest interest rate first and then works one’s way down the order. This helps reduce payments in the long run, as the initial debt can no longer accrue the high interest rate against it.

3. Not working with a budget

Another common mistake people make in their 20s is failing to set and stick to a budget. This involves checking their bank account regularly and tracking expenses such as groceries, electricity bills, entertainment, etc. To streamline this process, it may be worthwhile to create a budget at the start of each month. This can be done the old-fashioned way, using a pen and paper or with the help of a dedicated budgeting app that allows users to set funds for categories. Certain credit cards and bank accounts also allow the setting of such limits, which may be worthwhile. 

4. Lacking an emergency fund

The future is unpredictable, which is why it is necessary for one to have an emergency fund. This fund can be extremely useful during unforeseen emergencies such as car breakdowns, accidents, appliance failures, etc. 

To get started on putting together an emergency fund, experts recommend setting an initial savings goal of $500 (or any amount that one’s budget allows). Continue until one has at least three months of living expenses saved up, and put this in a separate savings account to reduce any urge to splurge. 

5. Putting off retirement savings

Given the rising debt today, many people in their early adulthood end up putting their retirement savings on hold. This can be a huge mistake, as one will lose out on the benefits of compound growth. 

The solution is simple—incorporate retirement plans into one’s regular monthly budget and invest the money in a separate account. This can be done through an employer-funded 401(k), an Individual Retirement Account (IRA), or other retirement savings plans. 

6. Not building good credit

A good credit score is important to keeping financial opportunities open in the future. This is because banks and credit unions typically look for a good credit score and history to offer lower interest rates on loans. Unfortunately, many people in their 20s forget to handle this aspect of their finances.

To build good credit, it is important to implement smart money management strategies, such as paying one’s bills on time (and in full), keeping credit utilization rates low, monitoring the credit score regularly, avoiding unnecessary debt, paying down debt, and building a credit mix. 

7. Starting a family without a financial plan

For many people, the 20s are full of major life events, including graduation ceremonies, starting a career, and weddings. Approaching this time without a financial plan in hand can turn out to be an expensive mistake.

When planning a wedding, one must work with a realistic budget. Create a list of priorities and non-negotiables, such as a venue, outfits, and food costs. Look for cheaper or affordable alternatives whenever possible, and avoid exceeding the budget.

Remember that raising children also requires a significant investment. According to some estimates, a middle-income couple would spend around $310,605 to raise their child to the age of 17 (on average). This number is subject to change depending on one’s region, state, income,  and other factors. To reduce the stress of the mounting expenses, one must set realistic expectations and create a healthy savings plan to navigate this challenging (yet exciting) time.

8. Making large and unnecessary purchases

While the allure of a luxurious lifestyle can be tempting, one must remain cognizant of one’s finances. Avoid impulse purchases, especially on big-ticket items such as electronics, automobiles, or appliances. Save money over time to be able to afford the item and avoid unwanted debt. Alternatively, consider opting for second-hand items to stay on track with the long-term goal of achieving financial stability.

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