Welcome to your 20s, the first decade of your adult life. You earned your degree, started your career, and are collecting a paycheck. Now’s the time to build up a strong financial foundation.
The money choices you make in your 20s will have an impact on your financial health for years to come. Take a look at a few of the most common money mistakes people make before turning 30 and learn how to avoid them to set yourself up for financial success.
Mistake 1: Not Saving for Retirement Right Away
When you land your first job at 22 or 23, retirement can seem like it’s a lifetime away, especially since for most 22-year-olds, retirement is at least 45 years in the future. But that doesn’t mean you want to skip out on putting money aside in your retirement account.
The sooner you start to save for retirement, the longer your money has the chance to grow, which means you’ll have more of it when you retire. The money you save is growing thanks to interest. The interest that your savings and investments earn also earns interest, in a process known as compounding. Compounding allows your savings to grow faster, so the sooner you start to save, the more your money will grow.
For example, if you set aside $1,000 for retirement at age 22 in an account with an annual interest rate of 5%, by the time you retire 45 years in the future, your $1,000 will have increased to $8,985.01. If you were to wait to save that $1,000 until you were 32, giving it 35 years to grow, you would end up with just $5,516.02.
Where should you put the money you plan on saving for retirement? Your options depend on your employment status.
Some of the most popular types of retirement accounts include:
- 401(k). 401(k) plans are offered by many employers. The money you contribute to a 401(k) plan comes right out of your paycheck, so you never see it, which can make it easy to start saving ASAP. Some employers also match the contributions that employees make, which can help you reach your savings goals sooner.
- Traditional IRA. An individual retirement arrangement (IRA) is available to anyone with earned income, even if their employer doesn’t offer a retirement plan. You can deduct the money you put into a traditional IRA from your taxable income for the year. You’ll pay income tax on it, plus on any earnings when you start to use the funds during retirement.
- Roth IRA. For some, saving for retirement using a Roth IRA makes more sense than a traditional IRA. When you contribute to a Roth IRA, you pay tax on the money. However, you don’t pay tax when it’s time to withdraw from the account, on the initial contributions, or on any earnings.
Even if you don’t have a lot to set aside for retirement in your 20s, saving something is better than saving nothing. Start small and increase your savings rate as your income increases and as you pay down debts such as student loans.
Mistake 2: Living Beyond Your Means
You’ve finished college, have your first job, and are living in your first grown-up apartment. It’s common to feel pressure to start living a grown-up life. You might feel like you need to keep up with your former classmates or that you need to impress people by having nice furniture and a fully decorated apartment or house.
One of the best things you can do for the sake of your financial health, both now and in the future, is to resist the urge or pressure to spend more than you make. Spending more than you earn is the quickest way to get into debt.
It’s also not a good idea to spend exactly what you make each month. When you spend everything, you have nothing left to save for retirement or an emergency fund. Instead, living below your means can help you plan for the future and build up a comfortable savings cushion — and it doesn’t mean you need to eat ramen every day or use empty milk crates for furniture.
As you get started with your adult life, make a list of things you need for your home, wardrobe, and transportation. Prioritize your list. For example, you probably need a bed more than a beautiful new couch. You might also need to prioritize making payments on a reliable car if you have to drive to your job.
If you don’t have the money to purchase the things you do need right away, set a goal and make a plan to save for them. Waiting until you have the funds set aside for a big purchase can help you develop good spending habits and can help you avoid getting into debt.
Mistake 3: Not Building Credit
If you hope to buy a home one day using a mortgage or plan on taking out an auto loan or any other type of loan, it’s crucial to establish good credit as early as possible. Having good credit won’t just help with your finances – it can also affect your ability to get a job, be approved for a lease, or get utilities turned on without a hefty deposit.
If you have student loans and have not missed any required payments, there’s some good news. Thanks to those loans, you may have already started to build credit. Your loans are most likely reported to the three credit bureaus and are used to calculate your credit score. If your parents added you as an authorized user on one of their cards, you also may already have a credit history.
Now the trick is to keep up the excellent work and continue to build your credit. You can do that by applying for your own credit card and using it wisely. Don’t charge more to the card than you can afford to pay back each month, and always pay your credit card bill on time.
Along with taking the time to build up credit in your 20s, it’s also a good idea to stay on top of your credit history and reports. You can check your report from each of the three credit bureaus for free, once a year. When you check your report, keep an eye out for:
- Accounts you didn’t open or that don’t belong to you
- Accounts showing missed or late payments that you know you paid on time
- Addresses or pieces of personal information that are not accurate
If you notice anything strange on your reports, notify both the credit bureau and the organization reporting the incorrect information. For more on how to dispute an error, read this article on the Consumer Financial Protection Bureau’s website.
Mistake 4: Not Making or Following a Budget
Your first job after college might be the first time in your life that you earn an income. Your 20s might also be the first time that you have monthly expenses, such as rent, utility bills, and car payments. The key to financial success is making sure the amount you earn is more than the cost of your monthly expenses.
Making a budget is the best way to compare your income to your expenses and to keep yourself from spending beyond your means. Making a budget also helps you plan for certain financial goals, such as paying off your student loans early. Budgeting lets you use your money for the things that matter most to you.
The process of making a budget is relatively simple. You can use our budgeting worksheet to record your monthly income and expenses.
One thing to pay attention to when putting your budget together is the difference between your expenses and income. If your expenses are more than your income, look for ways to reduce them. Start with the non-essentials, such as meals out or trips to the nail salon. After making cuts, if your income still doesn’t match your expenses, you might need to consider more dramatic changes, such as finding a less expensive place to live.
On the other hand, you might find that you have a surplus after you deduct your expenses from your income. If that’s the case, think about how to use that extra money in a way that will best serve you. You might use the money to make an additional loan payment every month, or you might set it aside to start saving for a down payment on a house.
Mistake 5: Missing Payments or Paying Late
Among the biggest money mistakes you can make in your 20s is missing payments or paying your bills late. Skipping payments or paying late hurts you in multiple ways.
First, it makes your bills more expensive. Many companies charge a late fee when you pay after the grace period, making you pay more for the same product or service. In the case of credit card bills, paying late can mean not only paying a late fee, but also paying a higher interest rate.
Missing or late payments also negatively affect your credit history and score. When you make a payment 30 or more days late, that information shows up on your credit report. This impacts your payment history, which makes up a significant portion of your credit score. Late payments or missed payments can lower your score considerably and can stay on your credit report for up to seven years.
If you’re worried about missing payments or have trouble remembering to pay your bills on time, there are a couple of things you can do to help yourself out:
- Set up calendar reminders so that you know when a due date is approaching or has arrived.
- Set up automatic payments on or before the bill’s due date. That way, you won’t have to worry about making the payment yourself or missing the due date.
Mistake 6: Not Building Up an Emergency Fund
You don’t have to be living on your own for very long to realize that life has a way of surprising you. Those surprises can take the form of your car breaking down, your cat needing emergency dental surgery, or you needing a new pair of glasses. An emergency fund helps you to cover the cost of life’s surprise expenses without having to take on more debt.
Along with starting to save for retirement in your 20s, one of the most important long-term financial decisions you can make is to start building up an emergency fund. Your emergency fund should be in an accessible location, such as a savings account, so that you can tap into the money when you need it most.
How much should you save in your emergency fund? It’s OK to start small. Aim for $1,000 at first. Having $1,000 set aside can help to cover the cost of many emergencies, from a broken down car to a sick pet. Once you’ve saved your first $1,000, you can focus on saving up enough to cover a few months’ worth of income. Having three to six months’ worth of expenses set aside means you’ll have enough to cover most financial surprises that come your way.
If saving $1,000 or three to six months’ worth of income seems like an impossible goal at the moment, don’t let that stop you from saving at all. Even putting aside $10 or $20 per month when you can afford it will help to create a financial cushion. If you’re struggling to save, it’s a good idea to review your budget to see if there are any areas where you can cut back.
Mistake 7: Not Having Enough Insurance
When you’re in your 20s, it’s easy to feel like you’re invincible, especially if you don’t have any chronic medical conditions. You might look at the cost of health insurance and life insurance and assume that they aren’t worth it, at least not yet.
Don’t be so quick to dismiss insurance, though. There are plenty of reasons why it’s essential to have, even when you’re in good health.
Perhaps the most important reason to get health insurance is that you never know when something might happen. You might be walking along the sidewalk, trip, and break an arm or a leg. The cost to set a broken bone and put a cast on it might be much more than you can afford to pay out of pocket. Having an insurance plan can help you cover some or all of the costs of an injury.
Having a health insurance policy also takes some of the financial stress out of choosing medical care. You might feel tempted to pick the cheapest option when you’re paying for everything yourself. When your insurance plan is covering all or part of your medical bills, you’re likely to choose the care option that will benefit your health the most.
You have several options when it comes to choosing health insurance in your 20s. If you have a full-time job, your employer likely offers a health plan. If you’re under the age of 26, you might be able to be covered by your parents’ policy.
If you’re self-employed or don’t work for one employer full-time, you can buy health insurance on your own. Depending on your income level, you may qualify for a subsidy that will reduce the amount of your monthly premium, making your coverage even more affordable.
When it comes to choosing the appropriate level of coverage, pick a plan based on how often you go to the doctor. If you have a medical condition, you might prefer a plan with a higher monthly premium and fewer out-of-pocket costs. If you don’t have any chronic conditions and only see a doctor for preventative care, you might choose a plan with a lower monthly premium and a higher deductible.
Life insurance might not seem like something you need to worry about until you have a spouse and children. But there are benefits to considering purchasing a life insurance policy when you’re single and in your 20s. If you have debts, such as private student loans or credit card debt, the benefit from your life insurance policy can pay off those debts if you pass away unexpectedly.
Another reason to consider life insurance when you’re in your 20s is that you’ll get the lowest premium rates.
If you have any financial obligations that will remain after your death, such as supporting a partner or a child, or debts that won’t be canceled after death, it’s worth looking at your life insurance policy options and choosing a plan that works for you.
Mistake 8: Not Setting Any Financial Goals
Remember when you were a kid and you got an allowance? It’s likely you set goals for that allowance. Maybe you wanted to save up to buy a video game or a skateboard. Perhaps you wanted singing lessons or acting classes, but your parents said you had to pay for them yourself.
Setting financial goals as a young adult is similar to setting financial goals as a kid with an allowance. Chances are, your goals are likely to be different. Instead of saving to buy a $75 video game, you might save to buy a $175,000 house. Instead of saving up for music lessons, you might be working on paying off your student loans early.
There are three types of financial goals to set. The first are short-term goals. You can achieve a short-term goal within a year. Saving up to replace the couch you’ve had since sophomore year of college with a more comfortable, less worn-out model is an example of a short-term goal.
The second type are mid-term goals. These are things you can accomplish within five years, such as paying off hefty credit card debt.
Finally, there are long-term goals. You’re likely to save for long-term goals over several years. Building up a down payment for a house is an example of a long-term goal.
If you’re new to goal-setting, it’s OK to start small. Create a goal you can confidently achieve and that you can keep track of easily. For example, you might want to save $1,000 for a new couch, and you might want to buy that couch within the next two years. You can save $50 per month for the next 20 months to reach your $1,000 goal.
Need some inspiration when it comes to setting a financial goal? Here are some ideas to get you started:
- Pay off credit card debt.
- Save for a wedding.
- Save for a new car.
- Pay off a car loan.
- Pay off student loans.
- Save for a down payment on a house.
- Save for a vacation or travel.
- Save for new furniture.
- Save up to take parental leave after having a baby.
- Save for a new pet.
PSECU Can Help You Start Your Financial Life on the Right Foot
There’s a lot to learn about money when you’re just getting started. Luckily, we’re here for you. We want to help you master money management so that you can reach your goals and make the most of your finances. Our WalletWorks page offers plenty of tips and advice to help you get started saving for retirement, creating a budget, and paying down debt. We also offer a free standalone app that makes saving easy and fun – the PSECU Savings App. Download it from your device’s app store.