In my early 20’s, most of my time was spent having fun, living in the moment, and juggling going to college and my internship. I was going to college in one of the greatest cities in the world, New York City. Needless to say, life was pretty awesome. Unfortunately, I was so busy enjoying my 20’s I did not spend much time worrying about money and my future. Some of the financial mistakes I made in my early 20’s, I’m still paying for in my 30’s. The annoying part? Many of the financial road bumps could easily have been avoided if I just paid attention and took time to monitor my finances. To all you 20 somethings out there, take note. Here are my worst money mistakes:
Buying Stuff I Didn’t Need
When living with my parents before venturing off to College, money was never a problem. They were always financially secure and were able to buy me everything I wanted and take me on nice vacations. After a while, I started getting used to the lifestyle and I didn’t realize (no one ever told me) this had to slow down once I became a “grown up” and left for College. I would go out on weekly shopping sprees, bought food at one of the most expensive grocery stores in the city, and would splurge on luxury tanning salons, manicures, worked out at the most expensive gym, and so on. I was living way beyond my means. I am not saying you should never treat yourself to something nice, but this should always come after putting away money for important things, like food, rent, utilities, savings, and financial independence/retirement investing account.
My advice: There’s really nothing that makes spending beyond your means okay, so you might as well hit the rethink button. Once you start making money you can start indulging in the finer things in life, but until then, stick to a strict budget, live as cheaply as you can, and hustle until you can afford the stuff you really want. Also, never buy anything over $100 without thinking about it for at least 24 hours. From experience, I have realized that impulse purchases usually end up in the back of my closet.
Save After Spending
I wish someone told me 10 years ago the right way to do this is to spend after saving, not the other way around. Saving was never an option in my early 20’s, as I was set on the fact that I needed every penny for my expenses to support a lifestyle. When I look back, there are so many things I could have cut out of my budget that could have gone to my investment account and retirement account. I know, why think of retirement now? But the earlier you start saving, the earlier your money begins compounding. As a routine, make sure to pay yourself first, meaning set aside money for your future and make sure you will be able to not only live comfortably today, but also feel financially secure tomorrow, next year, 20 years from now, and when you retire.
My Advice: The first thing you should do after receiving pay check is transfer a target amount into your bank account, investing account or retirement account, depending on your goals. Almost all banks have a feature called Automatic Transfer or Automatic Savings Programs, where you can train your account to save money for you, by transferring money from your checking account to your bank account on a certain day every month (you should schedule this for the same day as you receive your salary).
Getting Into Credit Card Debt
As many people my age, I used my credit card like it was free money, thinking I could always re-pay it later when I was making money. Not a smart move. First of all, your credit card is not free money, the interest rates are usually grueling, and it is much harder to pay off than you think it would be. Using a credit card is not necessarily a bad thing as long as you have a plan for it, meaning using it to build up your credit. Using your credit card when you don’t have the money to re-pay it can put a big strain on your financial situation, and it can also severely hurt your credit score.
My Advice: Get a credit card and only use it for expenses you know you are going to be able to pay off within the next month. Also, shop around before signing up for a credit card to compare interest rates, fees, features, and rewards programs. Rewards programs means you can earn points, miles, or cash back for the purchases you make. For example, I am using my current rewards program to earn enough miles for my next trip home.
Not Paying Attention to my Credit Score
My poor credit card habits did not leave me unscathed, unfortunately it took me way too long to go in and try to fix it. I was an avid follower of “Out of sight, out of mind” and I can count the number of times I went in to check my credit score in my 20’s on one hand. This has impacted me in many ways, including my ability to sign the lease for my apartment, receiving loans from banks, and until I changed banks, I was paying extremely high interest on my credit cards. I am now working to rebuild my Credit Score, but this is not something that happens overnight. Check your credit report at least once a year at annualcreditreport.gov – It’s free.
My Advice: Use your credit card to build credit in a wise way. Your credit is determined by 5 main factors:
- Payment History (35%)
- Credit Utilization (30%)
- Length of Credit History (15%)
- Types of Credit in Use (10%)
- New Credit (10%)Many people believe your credit score is only based on credit card payments and as you see above this is not the case. Also, remember that any unpaid bills can be sold to a collection agency, which will hurt your credit score. This means you should always pay 100% of your payments on time, not just your credit card bills. Be careful of maxing out your credit card and owning too many credit cards. Maxing out your credit card sends warning signs to lenders, as they will be worried that you are not going to be able to pay back the balance owed. Opening many credit cards sends “inquiries” to your credit report and lenders might view this as you struggling with financial troubles or getting in over your head with debt. Suggestion: get rid of all store credit cards as they usually have exceptionally high interest rates. Keep one or two of the following credit cards: MasterCard, Visa or American Express.
Not Signing Up For a 401(K) plan at my first job
One of the biggest mistakes I made when landing my first job after college, was not signing up for a 401(k). Hell, I barely knew what a 401(k) was back then. A 401(k) is a company retirement plan which you may be eligible to participate. I ended up spending the money that should have gone towards my retirement on stupid useless expenses. I am embarrassed when I think about the money I lost out on. The earlier you start, the more money you could have for when you retire, simply because of its compounded earning capacity (time value of money).
My Advice: If you are already signed up for your company’s 401(k) account, you’re way ahead of your financial planning game. If your company offers a 401(k) account and you’re not signed up yet; run, jog, powerwalk – do whatever it takes and get this done today. Check if your company offers a company match. A company match means you can receive free money from your employer by contributing a specified percentage (usually between 3% to 6%) of your salary. Consider making contributions that will achieve the maximum company match. All contribution are tax deferred, meaning you only pay taxes on contributions and earnings when withdrawn.
Not Creating an Emergency Fund
A big thing I learned going through my 20’s is that emergencies happens, and when they do, it’s usually not cheap. Hospital bill or deductible, car repairs, veterinary bills, apartment leaks, and the list goes on and on. For many of these emergencies I did not have anything saved up, and ended up either charging it to my credit card or asking my parents for money. This was not a good strategy to have, as it put me into even worse credit card debt and also put a strain on the relationship with my parents.
My Advice: Start small and gradually build up your Emergency Fund. Have a set amount you put away each month and make sure you don’t touch your emergency fund unless there is an actual emergency. The rule of thumb is to have 3-6 months of monthly expenses in your emergency fund, however, for individuals with uneven income, like freelancers and self-employed people, you may want to increase the amount.
Make sure to park your emergency fund in a savings or money-market account. The main goal here is stability and the ability to access the money without having to pay a penalty or have a loss of value. Important: do not use your 401(k) as your emergency fund. You may get hit with loan interest taxes penalties but most importantly the growth of the money over time. We wrote another article on how to build an emergency fund, which you can read here.
Not Investing Earlier
As for most young people, retirement seems very far down the road when I was in my 20s. I was living like there was no tomorrow, and investing did not become a priority until I turned 30 and had a mild meltdown because of the financial mess I had put myself into. Unfortunately, I have now lost over 10 years of potential compounded interest, which I can never get back. A misconception I had about investing was that you had to be rich in order to do it – you don’t. I initially started putting away $200 per month and I am now putting away 20% of my salary every month. Part of it goes to my retirement account and part of it goes to my other investment accounts.
My Advice: Start investing at your earliest convenience and try putting away at least 5% of your salary as soon as you start working after college. When starting to invest, it is important that you have a general understanding of how the market works and how to develop a balanced portfolio. Having a balanced portfolio is one of the most important factors when investing, as this can protect you from big market fluctuations. Consider working with a Certified Financial Planner (CFP), who will educate you and get you started to financial independence and freedom. If a financial advisor is not possible for your budget at this point, there are plenty of great financial blogs out there, which can help get you get started. Here are a few:
- Crossing Wall Street
- Rockstar Finance
- Mr. Money Mustache
- Retire By 40
- Crystal Brook Advisors BlogFor more millennial money tips, subscribe to our newsletter here, or set up a free consultation with a Certified Financial Planner here.