There's a lot to figure out in your 20s as you transition to independence — but we'd argue that money management is one of your top priorities. The education system doesn't always do a great job preparing young adults to understand fiscal responsibility (and frankly, without the right teacher, finance can be pretty dull.)
As the COVID-19 pandemic tanks the economy into a recession, it's more important than ever to be financially aware at an early age. Don't stress too much — your 20s are all about slip-ups and going back to the drawing board. But in this economy, let's avoid these eight money mistakes if we can.
1. Sign up for way too many credit cards
Having a few credit cards can help you build up your credit score, but too many can lead to a cycle of compounding interest and debt. If you can't pay off the amount you spend every month, you'll be buried in the snowball effect. Financing vacations or a new wardrobe on credit card debt is an unhealthy financial habit.
Amy Maliga, a financial educator with Take Charge America, told us, "Whether using credit cards to pay for everyday expenses or using them to finance a lifestyle beyond their means, carrying a balance on multiple credit cards can quickly spiral out of control. It's better to ease into using credit by making a few small purchases on a single credit card and paying off the balance in full each month."
2. Skip saving
Building up a savings, emergency fund and retirement fund is as essential as ever right now. Set aside a portion of your paycheck for your savings and retirement fund. The compound growth you'll see from starting your retirement fund in your 20s can turn into an extra million dollars in the long run.
"People in their 20s should start saving for emergencies as soon as they begin earning a regular paycheck. We recommend an initial savings goal of $500, with the ultimate goal of having at least three months of living expenses saved. Even if money is tight, saving just $20 from every paycheck will begin to add up. Not saving for emergencies leaves people vulnerable to relying on credit cards or another high-interest lending to pay for an emergency," added Maligna.
3. Ignore the stock market
Investing in the stock market is an intimidating idea that often feels reserved for suits and full-fledged "adults." Elevating your wealth and securing your financial future may take more than just a good salary and an annual raise — and that's where investing can play a role. Robert R. Johnson is an author and professor of finance at Creighton University and told us, "People in their 20s should begin investing in a low-fee, diversified equity fund and continue to invest consistently whether the market is up, down, or sideways. Dollar-cost averaging into an mutual fund or ETF is a terrific lifelong strategy."
Johnson advised us that starting early is the key to successfully building wealth and that time is the greatest ally for the investor because of compound interest. Take advantage of the time you have to build that wealth and learn about easy ways to begin your investment journey, but make sure you prioritize your expenses, debts, and an emergency savings fund before setting money aside for investing.
4. Brush off a budget
Budgeting is often branded as a necessity to manage essential expenses or pay off debt. But to its core, making a budget is about being aware of your financial habits. Without an awareness of the money going in and out, it's easy to spend frivolously. What feels like an occasional, twice-a-week Starbucks coffee can add up to $50 a month.
You'll notice how you can save money by changing small habits like skipping the 70 cent cascara topping on your cold brew, picking up your take out instead of having it delivered (often adds at least $8 in fees and tips) or buying the generic brand of cereal. You can even use a budgeting app to do this work for you. Managing your money will only get more complicated as you get older, so it's best to start the habit now.
5. Impulse purchases and label chasing
Chasing a trendy lifestyle, especially one you can't afford, is an easy mistake to make in a world of Instagram gratification. Lisa Michaud, life coach and Goalden Girls podcast host, told us to avoid "trying to look rich instead of building wealth. Nice cars, fancy dinners, designer clothing — that's what we think wealthy people do with their money. But if you focus on just looking rich without focusing on building actual wealth, you'll never have financial security or freedom. Think about spending your money first on saving and investing to build wealth. Then, you can spend the money you make through investments on the treats. But without the actual wealth and money in the bank when you're done spending, you're not rich. You're just broke wearing nicer shoes."
6. Buying a new car when you don't need it
Sometimes, buying a brand new car is a waste of money. As soon as you drive the car off the lot, it depreciates 10% in value. If you paid $40,000 for the car, it loses $4,000 in value in that first month. Then 20% in the first year. Buying a used car instead — even a car just a year or two old — can help you increase your savings significantly.
"Cars are not an investment," says Kelan Kline, founder of finance blog The Savvy Couple. "New cars are one of the worst money mistakes you can make at any age. It's the triple whammy of bad financial decisions. You're financing a depreciating asset that also needs to be maintained. They are money pits through and though. Avoid buying a new car and instead buy a reliable well maintained 3-4-year-old car and save yourself thousands of dollars of headache."
7. Not shopping around or comparing quotes
You can save a lot of money by shopping around for the best deal on purchases like a car, cell phone provider, cable, insurance, etc. Most big purchasing processes can be stressful and drawn out — you may not want to spend even more time comparing quotes and prices. But any recurring or big purchase is worth the upfront effort of finding (or negotiating) for the best deal. You can even snatch a deal you find elsewhere and use it as leverage for a better price with your preferred retailer.
8. Renting an apartment alone
Your 20s can feel like a rush to independence, and living alone is a big part of that. But don't knock spending a few years with a roommate. You may achieve financial freedom faster by splitting the rent. And you'll save even more if those roommates happen to be your parents. Not everyone has the opportunity to live at home, but if you do, a few post-grad years living with your family while you save up is nothing to scoff at.