Think you’ve got managing your finances completely figured out? Even after you have the basics down, there are a few common money mistakes you might not have planned for. Below, you’ll find a list of frequent financial missteps 20-somethings sometimes make, and how to best avoid them.
Ignoring student loan repayment
Recent graduates will frequently defer their student loan debt immediately upon completing their final semester in order to give themselves time to find a stable source of income. This makes sense, but it’s important to remember that student loan debt should not be deferred longer than absolutely necessary. One factor to consider is this debt is non-dischargeable, which means it cannot be forgiven in bankruptcy filings. If you do need to explore a more permanent solution to student loan repayment, try researching loan forgiveness programs rather than avoiding the debt altogether.
Failing to balance debit and credit
Credit cards have their place when learning to manage your finances independently. Using credit cards helps you build credit to prepare for bigger financial decisions down the road, like taking out a loan for a new car or buying your first home. But be thoughtful with your credit card use. For example, you might choose to use your credit card for a major expense like a car repair, but pull out your debit card for day-to-day purchases like your morning coffee. Using a credit card prudently will better help you gain the best benefits of credit without accumulating excessive debt.
Failure to create (and stick to) a monthly budget
Creating a monthly budget might be the last thing you want to do after landing your first full-time job, especially if you only have a few monthly bills. However, it’s a wise investment of time. Creating a monthly budget will open your eyes to how you actually spend your money and help identify expenses that need to be trimmed. Budgets also provide a process to your spending, which helps you feel more in control of your finances and less anxious about the unexpected.
Slipping into an overspending habit
This can be a temptation, whether or not you’re new at managing your money independently. An important component of a healthy financial lifestyle is being cognizant of your spending. This means keeping an eye on exactly where you spend your money. Do you eat out several times each week or buy coffee every morning? You might be squandering more of your monthly budget than you realize.
The first step to avoiding such careless overspending is to track your spending each month. You can do this through online tools like www.Mint.com, which allow you to specify budgets for spending categories. The site will notify you if you have exceeded your limit, which empowers you to make more strategic budgeting decisions in the future (e.g., packing a lunch or making coffee at home). And remember, managing your money using debit is a great way to avoid overspending because you’ll only spend funds available in your checking account.
Failure to begin planning for retirement
Sometimes one of the hardest things to do in your twenties is plan for a lifestyle that is decades away, but it is important. Developing a habit of saving for retirement early in your professional career will protect you from future financial uncertainty. Remember, time is on your side. The earlier you begin putting money into your retirement account, the more interest you’ll accumulate over time. This is called compound interest – it means you’re earning interest on top of the interest earned in previous years. By saving, you can also take advantage of your employer’s 401k match program. Many employers will match your contribution up to a certain percentage, which maximizes your investment over time. Finally, find out if you qualify for a Roth IRA, a non-taxed retirement account. Remember, the important thing is to begin saving now. You’ll likely find that once the habit is in place, it’s not difficult to maintain as many plans allow you to automatically contribute from your paycheck each month.