When I was first starting out as a young adult, there are a few things that I wish I had known about managing my money. When you are in your 20s and 30s, it is the perfect time to set yourself up financially for the rest of your life.
Early in your life is a critical time to save and grow a nest egg that will make an impact on the rest of your life. Your 20s are the optimal time to get ready for middle age and to take advantage of compound interest. With the right planning when you’re young, you’ll be able you retire comfortably.
However, your early adult life can also seriously set up back your finances if you mess it up. Don’t make these mistakes in your 20s and 30s to become financially free later.
1. Focusing Only on Today
I get it. When you’re 21, you probably just want to go party with your friends and have a good time. And that’s completely fine to enjoy life while you have the opportunity.
The one thing to add as a young adult is to start to think about your future. This means selecting a career that will not only fulfill you but support your lifestyle. Start saving money and investing as early as you can so that it continues to grow for decades to come.
Even though your twenties are often for finding yourself, use those years to set yourself up for retirement. This is especially important if you want to retire early and reach financial independence.
If you only focus on spending money and having fun in your 20s, it’ll be that much harder to build wealth later. Instead, come up with a system for cutting back on a few expenses and saving consistently. Over time, that will make a big difference.
2. Taking on Too Much Debt
My 20s and 30s will probably have the most amount of debt of my entire life. We had student loans, car loans, and a mortgage that we were trying to pay down at the age of 25. Unfortunately, these debts were difficult to avoid since I didn’t have enough saved up.
Debt is a slippery slope that can get many people in trouble with high interest rates and fees. Credit card debt can be almost impossible to dig your way out of once you reach a certain amount.
When you are in your 20s and 30s, you probably don’t have a ton of savings for down payments. This means that you end up taking on some level of debt to be able to get cars and housing.
To set yourself up for long-term wealth, try to avoid as much debt as you can as a young adult. Drive a used car that’s cheaper than a brand new car. You might need to rent instead of buying a house, or buy a smaller home. Try to pay off your student loans early to minimize your interest payments. Avoid putting anything on your credit card that you can’t pay off right away.
If you can avoid debt early in life, you’ll be able to avoid interest payments and put that money towards building wealth.
3. Not Building Credit Early
When it comes time to get a loan for the debt you can’t avoid, getting the lowest possible interest rate is essential for saving money. To do this, you need to have a solid credit score to show lenders that you can be trusted. The higher your credit score, the lower the interest rate.
As you start your financial journey as a young adult, make the effort to build your credit score. To do this, have at least one credit card that you use regularly and always pay off on time. Every year, ask for a credit line increase but don’t max it out with purchases.
On top of your credit card, paying off existing student loans and car loans plays a role in determining your credit score. Always pay the minimum due on time and reach out for help, if you can’t make a payment.
Since a large factor in building credit is trustworthiness over time, you will need to demonstrate your ability to manage your credit and debt for several years. By starting early, you’ll have better credit that will help you save money when you try to get a mortgage or car loan.
4. Not Having an Emergency Fund
Even though we might think we are invincible when we are young, unexpected things happen that cost money. You car could need new tires or you get sick and need a trip to the ER. There’s plenty of things that pop up that could cost several hundred dollars.
It is a mistake for young adults to not have an emergency fund. If you don’t have money to cover unexpected costs, you could get sucked into debt and financial issues.
Building a small emergency fund in your 20s and 30s is critical to being able to cover unexpected expenses. As you’re first starting out, aim to put a few hundred dollars aside in a high-yield savings account that you won’t touch. Try to grow that over time until you have enough to cover 3 to 6 months of living expenses.
5. Putting Investing Off
One of my biggest regrets is not investing money earlier in my life. Since we didn’t have much spare cash for many years, we just didn’t make investing a priority until I was 30. If I had been able to invest a few dollars here and there starting when I was 20, it would have grown exponentially over time.
Your early career is when extra money is probably pretty tight. Your income is usually lower and you have greater startup expenses as you create a life for yourself.
Through all of that, it is a big mistake to not set aside a few dollars each month to invest. The money you invest early in your life will grow at a much faster rate than if you wait a few years.
The good news is that it is easier than ever to get started investing a few hundred dollars.
6. Lifestyle Inflation
Lifestyle inflation, or lifestyle creep, is when your expenses creep up as your income increases over time. The typical scenario is that you get a raise at work, so you feel that you can spend more money on extra things.
It may start with small increases in costs, like adding an extra video streaming service or buying a few extra pairs of shoes. As you get larger raises, there is the temptation to buy nicer cars and homes that cost more. Over time, these expenses really add up and you end up only being able to save a small amount of money each month.
Let’s say your first job pays you $5,000 per month and you have $4,500 in living expenses. You can save that $500 each month at a savings rate of 10%.
Fast forward a few years and now you’re making $10,000 per month. If you experienced lifestyle creep, your expenses may be around $9,000, meaning you are still only saving 10% of your income. However, if you can keep your expenses the same, you could have been saving $5,500 per month, or 55%!
Especially early in your career, hold back on the temptation to spend more money as you make more money. Keep your expenses low so that you can save and invest for your future.
7. Not Having a Long-Term Plan
Another mistake as a young adult is not having some sort of plan with what you want to do with your life. I’m not saying to have every little detail sketched out, but you should have some high level goals in mind.
For example, think about what type of job interests you and how much you can realistically make from it. Think about if you are ok working until you are 65 to retire or if you would rather shoot for a younger age. Do you want children? A house? How much do you like to travel? Where do you want to live?
All of this plays into what you should do in your 20s to set yourself up for that type of lifestyle. By having a general outline of what you would like the rest of your life to look like, you’ll be able to take steps towards accomplishing them.
Avoid these top mistakes when you are in your 20s and 30s to build your wealth and set yourself up for better financial success in the future.
