Your 20s seem like the perfect age between childhood and adulthood. You're out of school, finally, so you'll have more freedom than ever before, and you won't be pinned down with responsibilities from late-career advancements, serious relationships, or children. On top of that, since the life expectancy in the United States is now nearly 80, it feels like you have plenty of time to make up for any mistakes you make now.
That may be true, to some extent, but you're also vulnerable in your 20s. Some of the financial mistakes you make in your 20s could end up haunting you the rest of your life.
Why You Are Vulnerable in Your 20s.
Let's start by looking at why the decisions you make in your 20s so vulnerable:
- Compounding. The power of compound interest is hard to fathom across periods of decades. If you leave your 20s with thousands of dollars of debt, that could quickly escalate into a life-consuming obstacle to overcome. If you leave your 20s with thousands of dollars of investments, you could set yourself up for early retirement.
- Habit formation. Breaking habits is incredibly difficult. If you spend the first decade of your early adulthood forming and solidifying bad habits, it could take a very long time to get rid of them.
- History. Credit and buying power accumulate over time. If you have a sketchy history, it will be much harder for you to do things like buy a house, or even rent an apartment.
- Inexperience. No matter how much you think you understand about the world, most 20-somethings are still woefully inexperienced. That makes them vulnerable to much bigger, more destructive financial mistakes than their elder counterparts.
With those principles in mind, these are some of the biggest money mistakes to avoid when you're in your 20s.
1. Allowing credit card debt to accumulate.
The first mistake is letting your credit card debt spiral out of control, whether it's because you use your credit card for every purchase or because you aren't watching your debt total. Considering the fact that modern college graduates walk away from school with an average debt of more than $30,000, credit card debt can be even more destructive. With an interest rate of 20 percent, your $10,000 of debt can turn into $24,883 in just five years, and $154,070 in 15 years--so think carefully before making those purchases.
2. Failing to save for emergencies.
In your early 20s, you probably haven't experienced many financial emergencies firsthand, so you may not consider saving for them. But getting hit with an unexpected fee (such as a medical bill or car repair) can devastate even a well-organized budget. Make sure you have a few months' salary socked away, just in case.
3. Living without a budget.
If you ballpark your expenses, or simply live paycheck to paycheck, your poor financial planning is going to catch up with you--and fast. It's vital to start outlining and using a budget on a regular basis in your 20s; if you don't develop the habit, you may never get around to forming it. Plus, you'll be inclined to regularly overspend.
4. Living at (or above) your means.
If you make $1,000 a week, it's easy to be tempted to spend $1,000 a week, choosing the nicest apartment in that price range and spending the rest on entertainment. You may also be tempted to "keep up with the Joneses," buying a nicer car or better clothes than you actually need so you can maintain a higher social status. This kind of lifestyle drives people into debt, while people living below their means are building a path toward wealth.
5. Letting your credit deteriorate.
Your credit score is based on your history, so if you miss payments and build an unreliable track record in your 20s, it could haunt you for decades to come. And yes, it's possible to repair your credit, but it takes a long time--and it's much easier to start with good credit in the first place.
6. Going without insurance.
In the prime of your health, it's tempting to forgo certain types of health insurance. And things like renter's insurance may slip your mind completely. But these small monthly fees are nothing compared to getting hit with a $10,000 medical bill or losing $15,000 of property in a natural disaster.
7. Ignoring your retirement options.
Remember the power of compound interest? Here's where it matters the most. Starting to save for retirement in your 20s makes compound interest work in your favor, which means even a few thousand dollars now could add up to tens or even hundreds of thousands of dollars when it's time to retire. It's especially important to start saving if your company offers a retirement plan, like a 40(k). If you don't take advantage of these programs, you'll be throwing money away--and setting yourself up for a steep uphill climb when saving for retirement.
Yes, your 20s are meant to be a fun, exciting, and relatively carefree time. You're meant to travel, experiment, and even make some mistakes. Mistakes are, after all, the best way to learn. However, big mistakes, when carried out over the course of the decade, can end up haunting you for the rest of your life.
It's important to balance your present wants and your future needs, and make the best decisions you can in most situations you face; you'll thank yourself later.