For the YOLO generation, your 20s may seem like they’re all about embracing mistakes. But when it comes to money, what you do now can make or break your future financial success. Here are seven money mistakes you’ll want to avoid in your 20s.
Failing to set up a monthly budget and stick to it can leave you living paycheck-to-paycheck. Worse, you may find yourself slipping into debt when you’re tempted to spend more than you earn.
But with a well-planned budget, you can not only stay in the black, but also save for emergencies or retirement. To get started, you’ll want to track your expenses using a budgeting app or pen and paper.
To create a budget manually, list your monthly expenses and subtract them from your total income. From there, you can figure out which unnecessary costs, like entertainment or shopping, you can cut back on in order to reach your savings goals and pay for essentials, like rent, bills and groceries.
Not saving for emergencies
An emergency fund can spare you from getting into major debt if you suddenly lose your job, experience a medical emergency or otherwise incur unexpected costs, like an expensive car repair. Your savings should cover six months’ living expenses. Ideally, that would give you the flexibility to bounce back from an emergency.
To make saving convenient and consistent, set up an automatic transfer from your checking to your savings account around payday.
Postponing retirement savings
Just 55% of all millennials are saving for retirement, according to the 2014 Wells Fargo Millennial Study.
But a key to building a solid nest egg is starting early enough to reap the benefits of compound interest. Compound interest allows you to earn interest on your original investment, plus any money your account accrues in interest over time. So the earlier you contribute to a Roth IRA or 401(k) the more earning potential your initial investment has.
Not building credit
Good credit helps you access the best loans, housing and credit cards on the market. If at first you’re not approved for good-credit credit cards, consider applying for a secured credit card. Secured cards require a deposit as collateral in case you can’t pay your bill. But as you demonstrate your creditworthiness with a secured card, you can apply for cards with lower interest rates and better rewards.
Don’t apply for too many credit cards at once, though, or it’ll hurt your credit score. Once you have a card, make on-time payments and keep you credit utilization ratio, or ratio of debt to credit available, below 30% to raise your credit score. Monitor your credit with a free annual report from each of the three major credit reporting agencies: Experian, Equifax and TransUnion. For a few bucks extra you can get your credit score, too.
Neglecting student debt
The longer you take to pay off your student loans, the more you’ll spend on interest over the life of the loan. For instance, if you’re like the average 2014 graduate who’s $33,000 in debt, a 10-year repayment plan at a 3.4% rate will cost you just under $6,000 in interest over the life of your loan.
That said, if you have credit card debt and student loans, paying off credit card debt should be the priority, since it comes with higher interest rates. But your student debt shouldn’t be ignored. And as soon as your credit card debt is paid off, your contribution should increase towards student loans.
Letting your bills pile up
Short-term consequences of not paying your bills could include various fees, as well as higher interest rates on loans and credit cards. Bills that remain unpaid for extended periods of time might be handed over to collection agencies, in which case your debt may be reported to the credit bureaus. Once the delinquency is reported, your credit score could suffer until the debt is paid. Even after you pay up, collections generally remain on your credit report for seven years.
Setting up automatic payments on your bills is an easy way to avoid paying a heftier price for your bills in the long run.
Hastily marrying or starting a family
The costs of a wedding and child-rearing can set a young couple back financially before they get the chance to harmoniously merge their finances. The average cost of a wedding was $29,858 in 2013, according to a survey conducted by The Knot. And the steady increase in those costs over the years suggests we’ll be paying even more for “I dos” in 2015. Raising a child born in 2013 costs more than $245,000, according to a U.S. Department of Agriculture report.
So while considering the money angle while making family decisions isn’t necessarily what your heart wants, it may make sense for your long-term financial stability.