Your 20s is a decade of self-discovery. You’re graduating college, settling into a career — and for the first time, you’re in control of your financial life.
Personal finance might be a completely new territory for you, so you’ll probably make a few mistakes. The good news, however, is that you’re young enough to recover. But as your 20s come to an end and 30 starts knocking on the door, here are six money mistakes you can’t afford to make.
1. Carrying a Credit Card Balance
Getting a credit card in your 20s helps establish your credit history. But if you become too reliant on credit, your debt can soar and these balances can follow you into your 30s. Not only will you get hit with interest charges for every month you carry a balance, high minimum payments can cripple your finances. Too much debt drives down your credit score and increases your debt-to-income ratio, making it harder to qualify for mortgages.
It can take three, four or five years to pay off a credit card balance, so don’t wait until your 30s to come up with a realistic debt eliminating strategy. You have to get into a routine of paying more than the minimums, even if it means selling stuff you don’t need or using money from a tax refund. And once you’ve paid off a card, only use credit when you can afford to pay off a balance in full by the next statement.
2. Financing Your Lifestyle
In your 20s, the pressure to keep up with your friends can be intense. Your $15 Target purse may look noticeably cheap next to their $300 Michael Kors purse. And if everyone’s headed to Mexico for a five-star spring break week, you might be one of the first to book your flight, even though your bank account’s running on empty.
Being left behind or not being able to keep up isn’t a good feeling. Just know that 30 is a pivotal age in your life. This is a time when many young adults start thinking about homeownership, marriage and kids. And unfortunately, financing a lifestyle you can’t afford is one of the fastest ways to derail your plans. If you’ve never pinched a penny, or if you blow through money like its water, it’ll be much harder to afford a house and family.
3. Thinking Your Parents are a Permanent Safety Net
Your parents might be there to catch you whenever you fall, but it’s also important that you learn to stand on your own two feet — or at least try to. I’m not saying you have to move out by the time you’re 30. If you’re happy living at home and your parents are okay with the idea, why not. Just make sure you’re carrying your own weight and not getting a free ride.
This doesn’t mean you can’t ask your folks for help when going through a rough patch. However, you shouldn’t rely on them for financial support. Your parents are getting older. Their focus should be on saving for their retirement, not paying your expenses. The more they go into their bank account to help you, the less money they’ll have in their nest egg.
4. Thinking Your Retirement Account Will Grow Itself
When it comes down to saving for retirement, play time is over by the time you’re 30. Ideally, retirement planning should begin in our early 20s — as soon as we graduate and get a real job. Of course, some twenty-something adults are more interested in a good time than retirement planning. Just know that this account isn’t going to grow itself. If you’re approaching 30 and haven’t saved a dime for the future, you’re already behind. But you can catch up.
Talk to your employer to see if you’re eligible to enroll in the company’s 401(k), and then contribute as much of your income as you can afford. If your company doesn’t offer a 401(k), open an individual retirement account through your bank. Slowly increase your contributions as your income grows.
5. Ignoring Disability and Life Insurance
Just about everyone understands the importance of having health insurance. But what about life insurance or disability insurance?
When you’re young and healthy, you think nothing can stop you. However, life’s curveballs are hit-or-miss, and it only takes one accident or illness to leave us temporarily or permanently disabled.
Getting a short-term or long-term disability policy can protect your finances by providing cash flow if you’re unable to work. And while death is one of those topics we don’t like to talk about, we know it can happen at any age.
It doesn’t matter that you’re young or single. Make sure you have a life insurance policy by the time you’re 30 — sooner, if possible. A policy — even a small one — can pay your final expenses and provide your family with financial support. Term life insurance policies are relatively cheap when you’re young and healthy, costing less than $20 a month.
6. Inadequate Emergency Fund
Never building an adequate emergency fund increases the risk of credit card debt. A $1,000 emergency fund was a good starting point in your 20s, but it’s time to step it up a notch. Aim for a six to 12-month emergency fund. The more cash you have, the easier it’ll be to deal with surprises, such as a car repair, a home repair, medical expenses or a job loss.
Saving this kind of cash might seem like a fantasy, but it’s not rocket science. Take a look at your budget and see where you can cut back. If you can’t afford to save, then you’re probably living above your means. There’s nothing cute about being broke in your 30s, so now’s as good a time as ever to re-think your lifestyle and perhaps downsize. You’ll be surprised at what you can achieve financially after letting go of an expense house and car payment.