Those in their twenties may have a particular set of financial challenges to overcome. Paying down debt accrued during school, moving or getting settled into a new home, starting a job or career, and finding or maintaining friendships and personal relationships. Financial mishaps aren’t unusual, but there are steps you can take to help avoid blunders.
Below are nine costly money mistakes you should be aware of and try to avoid.
1. Only Making Minimum Payments
You may be facing a pile of debt from student loans, an auto loan, credit cards, and maybe a mortgage. It can be difficult to tackle the bills each month, afford day-to-day living expenses, and have money left over to save or invest. The latter is recommended below, but first things first.
Try to pay at least the minimum amount required on each bill as failing to do so could hurt your credit and make it more difficult or expensive to get a loan in the future. If you’re having trouble with Federal student loans, several income-driven repayment plans may make your month-to-month easier.
There are many tactics you can use while paying off debt, but the top of the list should be paying down high-interest debts such as credit cards and payday loans. Once you settle those, you can continue to strategically pay off debts. For example, paying a 4.29-percent student loan off early may not make as much financial sense as investing the money if you can expect to earn more than 4.29 percent in interest.
2. Thinking Emergencies Won’t Happen
People of all ages find it hard to have sufficient emergency savings. A 2012 study by the Financial Industry Regulatory Authority found that nearly 40 percent of those polled couldn’t, or probably could not, come up with $2,000 to deal with an unexpected need.
The reality is emergencies happen, and you’ll need a way to deal with them. If you rely on credit cards or short-term loans, you may wind up paying fees or paying more in interest than you borrow. While you are still young, you can try to save a part of your income for emergency savings, sometimes called a rainy-day fun. Ideally you can build up the fund to cover three to six months of living expenses.
3. Ignoring Retirement Savings
When retirement is 40 to 50 years away, it may seem like it’s too early to worry about setting money aside, but the earlier you start, the less you’ll need to save. Over time, compound interest can increase the value of your savings. For example, just one dollar set aside today may be worth over $10 in forty years (with a six-percent interest rate). Every hundred dollars could turn into over $1,000.
You can start investing with an Individual Retirement Agreement (IRA) or with your employer if it offers a company-sponsored retirement account, such as a 401(k) or 403(b). Some companies will also match a portion, or all, of the amount you save towards retirement
4. Not Learning About Investing
Investing can be a little intimidating, but as mentioned above even a small amount of savings can turn into a significant fund over time. Take the time to learn a bit about how investing works so that you can better understand what happens when you invest in a mutual fund – and what that is.
Check the local library and there are sure to be some books on investing. If you’d prefer to stay on the computer, there are free courses online at Investopedia and Morningstar. You could also opt for listening to a podcast during your commute, such as Motley Fool Money or Radical Personal Finance.
5. Too Much Retail Therapy
Spending money to feel good is common, but if you let this habit get out of hand, you may face financial turmoil for years to come. The best thing you can do is to acknowledge if, and when, you turn to shopping to make you feel better. Recognize this habit, and then try to replace it with something. Why not call up friends, go for a run or to the gym, or play a game that offers a similar sense of instant gratification.
6. Being Too Frugal
Buying cheap things may save you money at the moment, but it doesn’t necessary lead to the most savings in the long run. Being too frugal can be risky and may result in spending more replacing items or on repairs. Consider long-term quality with your purchases and become a wise consumer. If you’re shopping for something and don’t know where to start, there’s a subreddit with members that look for and recommend items that you last a lifetime.
7. Disregarding Employer Benefits
Even if you don’t plan to stay at your current job for long, you should still take advantage of the benefits offered by the company. In addition to subsidizing healthcare, life insurance, and disability insurance, you may have access to retirement contribution matching (mentioned above), discounted company stocks, or money for professional development.
8. Matching Spending to Earnings
Getting a first paycheck can be exciting, and bonuses (which are not taxed extra) and raises should be celebrated, but try not to spend every new dollar of income. By controlling your spending and keeping it close to level when you get a raise, you may be able to avoid living paycheck to paycheck. As a general rule of thumb, live below your means not at or beyond them.
9. Snubbing Health Insurance
Young people tend to be healthy, but that doesn’t mean you can ignore health insurance. If your employer doesn’t provide a plan, you may have to opt for buying insurance through a government marketplace or directly from a healthcare provider. Plans can be expensive, but not as expensive as a single medical emergency.
Low-income individuals might consider buying a catastrophic plan that has high deductibles (what must be paid before the insurance company pays out) but low premiums (monthly cost). These plans can help limit the cost of emergencies but don’t do much to cover day-to-day care. For routine checkups, look for a low-cost or free charitable clinic.