Oct 20, 2022

11 Financial Mistakes to Avoid In Your 20s

Your 20s aka adulthood. For many of us, this means getting a job or going to school. Most young adults make a lot of mistakes with their money. In today's blog post, we want to point out some of the most important ones that can get in the way of your financial goals.

11 Financial Mistakes to Avoid In Your 20s

When you're in your twenties and just starting out on your own, there's a lot to learn, and we think that learning how to handle your finances should be at the top of that list.

Finance can be baffling to some people without the correct teacher, and unfortunately, the educational system does not always do a good job of teaching young individuals to be responsible with their money. The majority of young adults make a number of blunders with their financial lives, and in this piece we'll discuss some of the most significant slip-ups that can have a devastating impact on your ability to reach your financial goals.

If you feel like you need 1:1 help starting off your financial journey independently, that's okay and recommended. One of the advisors at Vincere Wealth can get you pointed in the right direction, be it to pay off those student loans as fast as possible, learning how you can live a "work optional life" or to start investing. You deserve to go after those goals! Speak with an advisor here.

Let's get into those tips!

1. Not making a plan aka budget for your money

Being aware of your spending patterns is the key to creating a budget. It's quite simple to overspend if you don't keep track of how much money comes in and goes out. To help you allocate your money more intentionally toward your goals, we suggest following the 50/30/20 rule.

Make a list of all of your sources of income to get a clear sense of how much money is coming in. After that, you can allocate your funds as follows:

  • 50% of your take-home pay to needs (bills, food, transportation, etc.)
  • 30% of your take-home pay goes to wants (ski pass, concert tickets, travel, etc.)
  • 20% of your take-home pay to your future (debt payments above minimums, saving, and investing)

Note: In your 20s, when you're just starting out as an adult and need to buy a work wardrobe, maybe a car, and a deposit on a place to live , you may need to spend more than 50% of your income on "needs." That's fine, because you can always make changes to your budget (your budget is supposed to change every month). For now, if you can, you can borrow the difference from the 30% in the "wants" bucket. This way you can focus on the entire 20% to "Future You" plan and go for it as hard as possible, you'll reach your goal of i.e. the work optional life faster. Start with what you have now and try to grow it by 1% or 2% every year or so. This is best done with things like bonuses, raises, and tax refunds.

If you need help with creating the perfect budget for you, snag a FREE Budget template from Vincere Wealth here.

2. Lack of clearly defined financial goals

What do you envision yourself doing later on? Are you trying to find a house for your dog with a yard? To be rid of student loan debt?

For your tenth wedding anniversary, would you like to visit all of Europe? Any of these activities will require you to have financial objectives. Setting objectives is one thing. Making those dreams a reality is very different from simply having them. It's far too simple to become stuck in the "I have time" or "It's too early to think about that" frame of thinking. However, we think that by taking this stance, you are devaluing yourself.

We suggest taking these steps:

  1. Categorize each financial goal as short, mid or long-term.
  2. Set a target date.
  3. Prioritize each financial goal: critical, need, or want.
  4. Know how much you have vs. what you still need to save.

This can be intimidating for some, but with the right financial advisor on your side, it can be a smooth and stress-free process.

3. Credit card debt is a big no-no.

So, credit cards aren't a bad thing at all. We can all agree that having a few credit cards can help you build credit, but having too many can lead to a cycle of interest and debt that gets worse and worse. If you can't pay off what you spend each month, your debt will keep growing. Using credit cards to pay for vacations or new clothes is a bad way to handle money. Carrying a lot of debt on a lot of credit cards can quickly get out of hand, whether it's for everyday expenses or to pay for a lifestyle that's too expensive. A better way to ease into using credit is to buy a few small things with a single credit card and pay off the bill in full every month. Trust us.

Why does it hurt so much to have credit card debt?

Because interest rates are very high. The interest rate in the United States is now  18%. Most other kinds of debt, like student loans and personal loans, don't have interest rates that are quite as high. We usually tell people to just pay the minimum on these loans while they focus on paying off their credit card debt first. When you make minimum payments, the money goes first toward any interest that hasn't been paid. Then, you might have to pay interest on the interest you haven't paid yet. To put it another way, it adds up. So, your minimum payments might not make much of a difference – if any at all – in the amount you owe.

For example, let's say Jane owes $9,300 on her credit card and the interest rate is 17.8%. Her payment plan says that the minimum payment is either 3% of the balance or $25, whichever is greater (pretty typical). If Jane only made the minimum payments on her $9,300 balance, it would take her more than 17 years to pay it off. And the interest would cost her $8,600. Yes, you read that right. When everything is said and done, Jane will have paid almost twice as much as she owed in the first place. Major yikes.

4. Living beyond your means

Living beyond your means is defined as spending more than you earn each month. Credit cards, loans, and a lack of funds can all lead you down this path. This approach, however, cannot be maintained, as your costs will eventually catch up with you.

Here are some signs that you’re living a lifestyle you simply can’t afford:

  • You live paycheck to paycheck.
  • Your credit score has dropped.
  • You’ve stopped your retirement contributions.
  • Your savings account isn’t growing.
  • You’ve been charged an overdraft fee more than once for the year.

If any of these apply to you, it's important to not beat yourself up but rather to reflect on what went wrong and figure out how to fix it.

Here's how you can stop spending more than you earn:

Monitor your spending patterns: you may be spending more than you think, especially in some categories, therefore it's important to review your spending habits (through budgeting and checking) and credit/debit card bills. As an example, maybe you're spending too much money on meals since you're constantly ordering out or getting takeout. You can develop a strategy to reduce expenditure by identifying the areas where it is most excessive. Possible solutions include restricting restaurant visits to weekends and doing more shopping and cooking at home.

Here are 70 cheap and easy dinner recipes for you to try!

5. Not investing your money

Many young individuals find it more convenient to delay making any investment decisions until their financial situation is, hypothetically speaking, more stable. However, even with student loan debt and low earnings, twenty-somethings are actually in a good position to enter the investing world. Despite having little resources, young individuals do have one advantage: time. There is a reason why Albert Einstein referred to compounding as "the eighth wonder of the world"—the capacity to increase an investment by reinvested returns. Investors can build wealth over time by using the magic of compounding, which only needs two things: time and the reinvestment of earnings.

For example: By the time the investor was 60 years old, a single $10,000 investment at age 20 would have increased to over $70,000 (based on a 5% interest rate). When investing the same $10,000 at age 30, the return is approximately $43,000, whereas at age 40, the return is only $26,000. Money can create more wealth the longer it is put to use.

Investing is NOT just for the rich.

When people hear the word "investment," they immediately think of stock picking and day trading, as well as large sums of money. Anyone who has put even $20 into a retirement account has already begun to invest." Many brokerages now offer fractional shares, which allow clients to invest as little as $5 in a stock of their choice, allowing you to share in the same percentage gains as someone with more money to invest.

To get started with investing today, speak with an advisor at Vincere Wealth today!

6. Not saving for "Future You"

You might feel that it's unrealistic to stress about retirement right now. But keep in mind that you won't be able to work forever, so it's a good idea to start saving for retirement as soon as possible. And not just that. The earlier you start the MORE you have aka the LESS you have to worry about. Saving enough money for retirement is made easier by the power of compound interest, which works in your favor if you start investing early enough (when the interest you earn starts earning interest). A small amount put away from each paycheck into a 401(k) or IRA every month can add up to a significant sum over time.

The best time to start? Today. Your golden years will thank you.

7. Not having an emergency fund

Emergencies can happen to anyone, at any age. Those unforeseen circumstances may be anything from losing a job to an unexpected car-repair bill. An emergency fund can protect you from crippling debt and give you peace of mind while facing stressful situations. A great rule of thumb to start with is saving at least three months' worth of salary, and preferably more. Include your emergency fund in your budget until it's fully funded.

Here are what an advisor at Vincere Wealth said about some advice he would give his 18 year old self:

8. Not building good credit

Yup, someone please tell Dave Ramsey that credit scores do in fact matter.

The ability to demonstrate a positive payment history is crucial whether asking for a rental, a credit card, or a loan. Having a high credit score takes time and the development of creditworthy behaviors, such as paying bills on time. Keep your credit utilization (the percentage of your available credit that you are actually using) as low as possible and avoid opening a large number of accounts all at once. Credit card balances shouldn't exceed 30 percent of your available credit and should be paid off each month.

9. Not taking advantage of your free time to earn extra money

You are at a point in your life where you have more time and energy than ever before. Avoid wasting this valuable commodity on excessive TV viewing, endless scrolling on Tik Tok and instead use it toward a side hustle. A side business can be a great way to supplement your income, and there are plenty of opportunities for small employment online.

Here are 10 Exciting Side Hustle Ideas For Your 20s

10. Learn the strategies to protect your income from a high tax bill- early on

Although it is important to pay all that is legally owed to tax authorities, nobody has to pay extra. Earned income is subject to additional levies to pay government programs like Social Security and Medicare, in addition to federal, state, and municipal taxes. Although evading taxes can be challenging, there are several options available to help you minimize your tax liability.

For example, your side hustle can not only increases income but also has various tax benefits. Many expenses that are incurred as part of regular business operations can be subtracted from income, lowering the overall tax liability. Health insurance premiums are a particularly significant tax benefit for self-employed people, if certain conditions are met. A company owner may also use the home office deduction to write off a portion of their home expenses if they properly adhere to IRS regulations. You can deduct from your income the share of utilities and internet that you use for your business.

Note: The taxpayer must run their business for a profit in order to be eligible for these deductions. The factors that the IRS considers are listed in Publication 535. Taxpayers are assumed to be operating a business for profit if they have seen a profit in three out of the previous five years.

Consult with a Vincere Tax expert if you want to reduce your tax liability and learn about all the ways you may save a lot of money.

11. Trying to keep up with the Joneses

Peer pressure causes young people to spend their money on flashy cars, expensive lunches, and other nice-to-haves because they are too readily swayed by it. Usually, we do this in an effort to appear successful to our peers. But truly, nothing is as successful-looking as success itself, and spending all of your money on gimmicks won't get you there. The riskiest aspect of "keeping up with the Joneses" is that you can begin to rely too heavily on your credit cards, store accounts, and personal loans.

The next thing you know, you're caught in a debt cycle from which it may be difficult to escape. Live as frugal a life as you can. The best present you could ever give yourself is this. Being young has several benefits, one of which is that time is on our side. Although we might believe that making wiser judgments must be sacrificed in order to live our best lives, this is not true. We won't have to spend the rest of our lives living in regret if we manage our money more properly.

Wrapping Up

When it comes to managing one's personal money, the adage "knowledge is power" is particularly true. There is always more to learn, and there are so many tools at our disposal, even if your parents have taught you the fundamentals of handling your financial appropriately.

Learn how to invest and save, and educate yourself on taxes and other costs. Being uninformed about important financial tools could leave you open to being taken advantage of or making bad choices.

Read more: Three Financial Books That Changed My Life

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