Your 20s are a period of self-discovery. No one expects you to have your life together, and you have significant freedom and flexibility to carve a place for yourself in your career, community, and relationships. But despite the youthful freedom that your 20s offer, the decisions you make now have the potential to impact your life well into the future. If you aren't careful, you could set yourself back a decade or more.
Let's look at the three main reasons why your 20s are such a financially vulnerable time:
- Compound interest. Compound interest is incredibly powerful, and you can run the numbers to see its effects for yourself. Since you have so many years ahead of you, this could be a huge boon for your eventual wealth, or an equally huge setback. Allowing debt to grow with compound interest could set you back a decade, while investing could allow you to grow your wealth by a similar degree.
- Limited income. Most 20-somethings aren't making as much money as their late-career-stage counterparts. With a lower income, you'll have a lower margin of error for financial mistakes, and less flexibility with how you spend or save your money.
- Lack of experience. Even if you think you know what you're doing, your 20s are still a time of limited experience--and limited experience tends to breed mistakes.
Avoid these mistakes if you want to maximize your chances of a financially successful future:
1. Living paycheck to paycheck. ?
Living "paycheck to paycheck" means making just enough to scrape by, with little extra left over to save or invest. This habit is destructive, since it affords you almost no forward momentum or mobility. And while you may think this is the unavoidable result of your circumstances, the reality is, there are many ways you can stop living paycheck to paycheck, such as reducing your cost of living, establishing a second source of income, or establishing a stricter budget.
2. Not investing in your training or education.
The more educated and more skilled you are, the more money you'll make over the rest of your lifetime. If you aren't investing in new skills or new knowledge now, you'll be missing out on earning potential for the next several decades. It might take some extra time or money upfront, but investing in yourself is almost always worth the costs.
3. Failing to set up a retirement account.
Your retirement may seem like a distant dream in your 20s, but the sooner you start investing, the more wealth you'll be able to build. If your employer offers a 401(k), you should take advantage of it--especially if it comes with a company match. Otherwise, you should set up a Roth IRA, which will offer you tax-free growth. You don't need much to get started--only a few hundred dollars in most cases--but failing to establish this early can have long-term consequences.
4. Spending money frivolously.
It's tempting to join in on that spring break trip, or buy the latest smartphone model, but spending money frivolously is damaging for two reasons. The more obvious reason is that it instantly robs you of money you could use to save or invest. The less obvious reason is that this establishes a habit of mindless spending, which will continue to chip away at your finances for the indefinite future. This effect grows even worse when coupled with the possibility of lifestyle creep.
5. Accumulating debt.
Your student loan debt may already be keeping you from living the life you want. The last thing you want to do is add more debt to the picture. Some debts, such as those related to housing or education, are usually necessary and worthwhile, but try to avoid debt in any context with a high interest rate or the potential to follow you for years.
6. Keeping up with your peers.
It's tempting to try and keep up with your peers' lifestyles, especially if they make more money than you do. However, buying a bigger house, a nicer car, or going out for food and drinks more often will all take their toll on your financial health--and won't significantly increase your happiness. Aim to live a more minimalistic lifestyle.
7. Neglecting insurance.
If you're young and healthy, things like health and dental insurance seem like a needless waste of money. However, they have the potential to save you thousands of dollars (or more) if and when something goes wrong. The monthly premiums you'll pay pale in comparison. Make sure you have a solid, reputable policy, and attend checkups at least annually to catch things before they develop beyond the reach of proactive treatment.
If you can avoid making these mistakes, you'll set yourself apart from your peers. This isn't a guarantee of success or wealth, of course, but it will steer you away from the most common financial pitfalls of life in your 20s, and set you on a course of tremendous potential.