If only there was a mandatory class in high school or college to prepare students for the often-confusing world of personal finance – or at the very least, a crib sheet handed out at graduation listing all the common money traps that befall 20-somethings.
Unfortunately, most young adults find themselves on their own when entering the “real world” without guidance about money and how to manage it. It’s time to play Monday morning quarterback and review some of the basic money pitfalls that I – and a bunch of helpful folks on Facebook – wish we had known in our twenties:
Start saving for retirement as early as possible.
For most 20-somethings, the budget is tight and there isn’t a whole lot of room for extras. But when it comes to saving for retirement, allowing time for your money to grow is just as important as the money itself.
Consider this: Your money is worth more now invested than it will ever be. If you invest just $1 when you’re 20, it will be worth 1.75 times more than $1 invested when you’re 30, 3.5 times more than $1 invested when you’re forty and seven times more than $1 invested when you’re fifty because of the power of compound interest (assuming 8 percent rate of return and retirement age of 65).
What’s more is many companies will match your retirement contribution – That’s essentially free money! So start saving for the future now… Even if it’s just a little bit.
Don’t skip out on health insurance.
I get it – health insurance isn’t sexy. It’s not even tangible. But if you find yourself in the hospital without health insurance, you may be headed for financial ruin very early in life. If you’re not covered at school or by your employer, consider purchasing a health plan on your own. Some insurance providers offer plans designed for cash-strapped 20-somethings.
Live below your means.
If you went to college, you should be used to this lifestyle by now anyway. Why not extend the frugality for a few more years? Living modestly will allow you to save more money for your future. Consider living with mom and dad for a little longer, driving that jalopy for another year and avoiding new monthly bills for services you don’t really need.
Save early, save often.
When you’re barely scraping by, it’s tough to think about saving money. But having an emergency savings fund can help you avoid financial hardship in the event that you lose your job, encounter a major car repair or are slapped with a large unexpected expense. Keep in mind this is a totally different fund than your retirement savings. This one is for emergency purposes, the other is for your future and should be considered off-limits until then.
No one expects you to sock away thousands of dollars when you’re living on Ramen noodles, but even a small contribution can add up with time. Looking for ways to trim your budget so you can save more? Check out these 55 Money Saving Tips.
Just because you qualify for credit, doesn’t mean you need to take advantage of every offer.
You don’t need five credit cards and 10 retail store credit cards. I know it’s tempting to take advantage of those “10 percent off your purchase today” offers that retail stores throw at you, but those cards often carry high interest rates and fees. Now is the time to build your credit. Start with one card and pay your bill on time and in full every month.
Credit card balance transfers often cost more than they’re worth.
On more than one occasion, I’ve been swayed by tempting zero percent balance transfer offers only to get stung with outrageous fees. If you carry a balance on your credit card and are interested in taking advantage of a lower interest rate on another card, make sure you read the fine print. Often, balance transfers come with fees that cost more than the savings you’d get in return.
Avoid the slippery slope of debt.
In your twenties, you should be thinking about building your credit, not sinking it. Only charge items on your credit card that you can pay back immediately. And avoid only paying the minimum – If you get into this habit, you will be in debt for a long, long time.
It’s also important to only borrow what you need. Just because you may qualify for a large loan – whether it be a student loan, auto loan or home loan – doesn’t mean you should take on the full amount. Consider what you really need to get by and only borrow that amount.
Taking on too much debt, too early, is one of the most common money mistakes 20-somethings make. The freedom to charge whatever you want whenever you want is a tempting proposition. But when you finally come to and realize the error you’ve made, you may spend the rest of your twenties – and in some cases, the better part of your thirties – paying off what you owe. Don’t let this happen to you.
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By avoiding many of the traps that 20-somethings commonly encounter, you’ll set yourself up for greater financial success. And at 30 or 40, you won’t have to wonder, “If only I knew then what I know now.”
For more ideas on how to improve your financial health, check out Quizzle.com, where you’ll learn how to achieve your credit potential and get home loan recommendations tailored to your unique situation.
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- 10 Common Credit Myths