5 Mistakes People in Their 20’s That Negatively Affect Their Finances
I know, there are a thousand opinions by people all over the financial world about what to do with money in your 20’s. Are credit cards the Devil’s handy work, or the second coming of Jesus himself? To get a car/student loan or not? How much to put into a 401(k)? People have ideas of the right thing to do. I’m going to avoid all those questions and talk about the things you definitely shouldn’t be doing though.
Mistake 1 Doing college wrong:
People will argue about the merits of student loans and what to do about the current student debt crisis. However, it does come down to you as the student to avoid certain things that will not set you up for success. These two things basically come down to setting up earning potential and avoid outsized student debt. The first one is a far less controversial topic, so let’s start with that.
This does not just come down to choosing a correct major (though we will come back to that), but also in choosing the correct activities outside of the classroom.
Let’s get the obvious out of the way, you really should be working all the way through school. You should be capable of having the time management skills to do this. I managed to graduate from a 4-year university with a degree in computer science while working at least 20 hours a week (peaking at 45 hours my second to last semester).
Breaks should also be taken advantage of for working as well. If you do not outright have the money for it, spring break in Cancun is off the table. And no, financing is not an option for vacations.
Internships should be fought for. Jobs that may suck, but get you into your career field and preferred over higher paying or more enjoyable ones.
You should always attend a local, state school over your “Dream School”. I don’t care how nice the campus is, what its program is ranked nationally, or that you want to get distance away from your family. State schools are more affordable, and will make your life easier in the long run. I paid roughly $5,000 a year to attend my state school in the mid-2010s. Trust me, it makes life a lot easier in the long run.
And finally, yes, major matters. I’m not saying that everyone has to get into a high paying major like CS or Finance. I am saying that a degree that has very few actual job prospects is not one that you should pursue. Actually, I would argue that salary really shouldn’t be a factor as much as jobs prospects. Social work is a perfectly fine major. There are lots of them needed! However, a degree in Art History isn’t worth the money that it is printed on. You may as well have just gotten a job.
Mistake 2 Buying too much car/Not having full coverage:
In your 20s, your car is probably the most expensive thing you own. The funny part about this fact is that a lot of people do not carry full insurance on their cars. This is the thing that you have the most amount of money wrapped up in. I’m not saying you personally will cause an accident. But things that you can not predict can and will happen. This will make your most valuable asset worthless if you are not carrying full coverage.
Also, too much car is a rampant issue. Just because you can make the payments, does not mean that you should own it. This again is the most valuable thing that you own, and it only goes down in value. Tying too much money up in that (especially in your 20s) will really hurt your financial goals. Now I’m not going to go full hog on this and say that car debt in general is a bad idea. My personal rule of thumb is that you should never buy a car that will take you longer than 2 years to pay off. If it does, it’s too much car.
Mistake 3 Not having any kind of emergency fund:
I feel like this one should be self explanatory, but here it goes. Life will eventually rain on your parade. It just will. Things go wrong. It’s that simple. Having an emergency fund can turn a crisis into an inconvenience. Having an emergency fund can turn “Oh crap, the fuel pump on my car went out!” from a major issue that you’re going to have to fight to resolve into a couple long afternoons and one check.
How big and how fast you need to grow your emergency fund is pretty simple. 3–6 months of expenses tends to be the agreed upon amount. That means 7,500–15,000 should suffice for most people in their 20s. How fast is basically “How fast can you do it?”. Consistency is also key here. Do not put money in, only to have to pull it back out because you don’t have enough at the end of the month.
Which leads me nicely into
Mistake 4 Not having a budget:
Having a budget will help you make sure that you know exactly what money is going to be spent on this month. It allows you to visualize it, make a plan, and be hyper intentional about your financial goals.
Want to go on a trip?
Having a budget allows you to intentionally save up money each month so that you have what you’ll need to go on that trip. As opposed to hoping that you’ll be able to save up enough.
Budgets turn a hope and a prayer into a executable plan. We’ve all heard of SMART goals. A budget is just a SMART goal for your money. It allows you to be in control of your money, instead of it controlling you.
Mistake 5 Not saving for retirement:
Now this one is a little different. The rest of these mistakes will get you into acute money trouble. This one is more of a chronic issue. There’s an old adage that goes “Time in the market beats timing the market.” This adage is meant to discourage people constantly moving their money, but it also brings to light an important fact; The longer you have money in the market, the more it will grow!
Even if it isn’t a huge amount. A consistent investment into a retirement account of some kind is very important. If you can afford to invest up to your employer match, that would be an ideal case. This is basically a bonus your employer gives you for just saving money and staying with the company. Why wouldn’t you take advantage of it if you can!