As young adults, we often make a variety of mistakes that can impact our lives significantly. Some of these errors are environmental, like not using a biodegradable jar to store hemp. However, this article will focus on the financial mistakes commonly made during our 20s and 30s. Read on to learn seven things to avoid setting yourself up for financial stability later in life.
Common financial mistake #1: Not saving for emergencies
One of the most significant financial missteps in your 20s and 30s is failing to save for emergencies. An unexpected event can turn life upside down. Be prepared for job loss, medical expenses, or urgent car repairs with a safety net. Try to set aside enough money for unexpected expenses by saving three to six months of living expenses in an emergency fund.
Common financial mistake #2: Overusing credit cards
Credit cards can be a practical tool for making purchases and building a credit history. Still, they can also lead to massive debt if not managed correctly. Overusing credit cards without paying off the balance each month incurs high interest rates and leads to long-term debt problems. Instead, try to pay your credit card balance in full each month or limit your spending to prevent excessive charges.
Common financial mistake #3: Not creating a budget
A helpful tool for monitoring your finances is a budget. By keeping tabs on your earnings, spending, and aspirations for savings, you’ll be more informed and proactive about your financial situation. The failure to create one leaves you vulnerable to overspending and insufficient savings. To develop a practical budget:
- 1. List all income sources.
- 2. Identify mandatory expenses (rent/mortgage, utilities) and discretionary expenses (entertainment, dining out).
- 3. Set realistic goals for saving and investing.
- 4. Review your budget regularly to make adjustments as needed.
Common financial mistake #4: Not investing for the future
In your 20s and 30s, you may not think about retirement planning or investing your hard-earned money. However, this is the ideal time to invest because compound interest works in your favor over a longer period. Start contributing to a retirement account (e.g., 401k or IRA) offered by your employer, or seek professional investment advice.
Common financial mistake #5: Spending too much on housing and transportation
One of the major expenses in any individual’s life is housing and transportation costs. It’s easy to get carried away with expensive apartments and fancy cars, but that will just take a big chunk of your paycheck. Consider following the 30% rule to avoid this common mistake. The rule is to limit housing costs, including rent or mortgage payments, utilities, and taxes, to 30% of your gross income.
Similarly, watch out for overspending on transportation. While having a car may seem like a necessity, consider using public transport or opting for more affordable options like carpooling whenever feasible. By being deliberate with your spending on housing and transportation, you can ensure that you have more money available for savings or emergencies.
Common financial mistake #6: Not paying off student loans aggressively
In today’s world, where higher education is costly, student loans have become an unfortunate reality for many young adults. Keeping up with minimum payments is necessary, but paying off the loans faster to avoid significant interest accrual over time is also important.
Create a plan to eliminate your student loan debt to steer clear of this error. This might mean increasing monthly payments or making lump-sum extra payments whenever you receive bonuses, tax refunds, or other windfalls.
Common financial mistake #7: Not leveraging employee benefits
Employee benefits can be a significant source of additional financial gains and should not be overlooked during your 20s and 30s. Often, companies offer perks like health insurance, retirement plans with matching contributions, access to professional development courses or resources, and more.
Make sure you understand your company’s benefits package and maximize its value. This may mean signing up for your employer’s 401(k) plan and contributing enough to receive full matching contributions or utilizing available health savings accounts (HSAs) or flexible spending accounts (FSAs) for medical expenses.
Your 20s and 30s can be the most exciting and life-altering decades of your life. Despite the challenges and hurdles, taking control of your finances early on is essential to secure a stable future. Protect your financial well-being by applying these tips now – it’s never too late to take charge of your money!