Yahoo Finance I’m a Financial Advisor: These Are 14 Money Mistakes People Make in Their 20s
Your 20s are filled with learning experiences. This coming-of-age period is a time when most people get full-time jobs and live independently for the first time.
For many, this inevitably means making a series of financial missteps. Some are minor and easy to bounce back from, while others can set the stage for poor financial health well into adulthood.
Learn More: Here’s How Much the Definition of Middle Class Has Changed in Every State
Find Out: 4 Genius Things All Wealthy People Do With Their Money
“These mistakes are common, but they are also avoidable with the right guidance and mindset,” said Leyder Murillo, founder and managing director of Wolfpack Wealth Management. “Encouraging young people to seek financial education, start saving early and make informed decisions can set them on the path to long-term financial success.”
Knowledge is power, whether you’ve already made a few financial mistakes or are trying to preemptively avoid them. Here’s a look at 14 common money mistakes people make in their 20s.
Wealthy people know the best money secrets. Learn how to copy them.
Lack of Budgeting
Many people start earning their first full-time paychecks in their 20s, which can be exciting. However, it’s easy to go wild with spending without a budget in place.
“Many young people do not create or stick to a budget, leading to overspending and insufficient savings,” Murillo said. “Budgeting is crucial for understanding where your money goes and ensuring you live within your means.”
Check Out: 6 Reasons the Poor Stay Poor and Middle Class Doesn’t Become Wealthy
Ignoring Emergency Savings
You might know building an emergency fund is a good idea, but haven’t taken much — or any — action to do so. If so, he said not taking this crucial step is a significant oversight.
“Unexpected expenses can derail financial stability,” Murillo said. “It’s essential to have three to six months’ worth of living expenses saved to cushion against unforeseen events.”
Accumulating High-Interest Debt
If you’ve fallen into credit card debt, you’re not alone. Murillo said this is a common pitfall for people in their 20s.
“Young people often rely on credit cards without considering the high interest rates, leading to substantial debt,” he said. “It’s important to manage credit responsibly and prioritize paying off high-interest debt.”
Delaying Retirement Savings
It’s not uncommon for young adults to postpone saving for retirement, because they think they have plenty of time to do so, Murillo said. However, this approach won’t pay off.
“Starting early takes advantage of compound interest, significantly enhancing retirement savings,” he said. “Even small contributions to a 401(k) or IRA can grow substantially over time.”
Misconception About Roth IRAs
“While Roth IRAs are excellent retirement savings vehicles, there is a misconception that they are always the best option,” Murillo said. “If young people do not have access to a 401(k), they might miss out on the immediate tax deductibility benefits that traditional IRAs offer.”
Therefore, he said, balancing contributions between your Roth IRA and other retirement accounts, based on your unique tax situation, is crucial.
Lack of Financial Education
“A general lack of financial literacy leads to poor decision making,” Murillo said. “Investing time in learning about personal finance can empower young people to make informed decisions about saving, investing and managing money.”
Therefore, the more you learn, the better equipped you’ll be to manage your finances.
Spending on Lifestyle Inflation
As people start earning more money, it’s not uncommon for them to upgrade their lifestyle, Murillo said.
“It’s tempting to spend more on luxury items and experiences, but this can impede long-term financial goals,” he said. “It’s wise to keep lifestyle inflation in check and prioritize saving and investing.”
Overlooking Health Insurance
Health insurance is expensive, but a necessity. Opting to skip coverage to save money is a risky move, he said.
“Medical emergencies can result in significant expenses and debt,” he said. “It’s crucial to have adequate health coverage to protect against unexpected medical costs.”
Falling for Get-Rich-Quick Schemes
If a tactic to earn money fast seems too good to be true, it probably is.
“The allure of quick wealth can lead to falling for scams or high-risk investments without understanding the risks involved,” Murillo said. “It’s important to conduct thorough research and seek advice from reputable sources before investing.”
Neglecting To Set Financial Goals
It can be hard to grow your finances without a solid plan in place.
“Without clear financial goals, it’s challenging to create a road map for achieving financial stability and growth,” he said. “Setting short-term and long-term financial goals provides direction and motivation for saving and investing.”
Missing Out on Compound Interest
A lack of knowledge or fear of risk often causes young people to avoid investing all together, Murillo said.
“Starting to invest early, even in small amounts, can build wealth over time,” he said. “Understanding the basics of investing and taking advantage of employer-sponsored plans or low-cost index funds is beneficial.”
Jeremy Zuke, a financial planner with Abundo, agreed that starting to invest your money at a young age is a must.
“Any financial calculator will bear this one out — the earlier you get started investing, the better,” he said. “Filling up that Roth IRA every year in a simple low-cost index fund is going to be a very wonderful gift to the ‘future you.'”
Buying Cash Value Life Insurance
“This is almost always pitched by a relative, friend or college buddy as a great way to invest and get lifetime insurance,” Zuke said. “Unfortunately it’s a terrible investment and terrible insurance for most people.”
Essentially, he said there are much better investments you can make with your money.
“The opportunity cost of the sky-high premiums that could have been invested can be the difference between retiring early or having a hard time retiring at all,” he said.
Underinvesting in Themselves
Never forget that you are your own greatest asset.
“This might be a little counterintuitive, but a young person’s biggest financial asset by far is their human capital — the sum of all their future earnings,” Zuke said. “Investing in continuously improving skills, knowledge and relationships that translates to earning potential is a better use of money than any other investment.”
Gambling Instead of Investing
“Social media targeted at Gen Z is full of stories about individuals who hit it big on a stock or crypto investment — and new trading apps encourage active trading with rewards and gamification,” Zuke said. “This ends up, on the whole, being a direct transfer of wealth from the inexperienced young investors to large institutions and other experienced investors.”
Instead of falling for these schemes, choose more traditional investments proven to provide future returns.
More From GOBankingRates
In Less Than a Decade, You Won't Be Able To Afford Homes in These 20 Arizona ZIP Codes
These 10 Used Cars Will Last Longer Than an Average New Vehicle
Trying to Build Your Savings? Make Sure Your Account Does These 6 Things
This article originally appeared on GOBankingRates.com: I’m a Financial Advisor: These Are 14 Money Mistakes People Make in Their 20s
