Saving for retirement or financial goals may be the last thing on your mind as a 20-something — but when it comes to managing money, your 20s are a critical decade.
Time is on your side when you’re young, and a head start in saving and investing could set you up for a wealthy future.
To get on the right track, start by breaking these terrible, yet common, money habits:
1. Not saving enough -- or at all
There's a difference between knowing you should save and actually doing it. According to a USA/Bank of America Better Money Habits poll, about 20% of millennials haven't started saving. While 69% have a savings account, most have less than $5,000 in it.
How to improve: When it comes to saving, retirement contributions can be a great place to start. You can contribute to your employer's 401(k) plan if it offers one (and take full advantage of the company match if offered), or you can look into other account options, such as a Roth IRA.
Next, automate your contributions. This way, you'll never even see the money before it's stashed away, and you'll learn to live without it.
2. Not being educated about student loans
The class of 2015 is the most indebted class thus far. The average class of 2015 graduate will be stuck paying off $35,000 in student loan debt. With numbers that high, you would think students and graduates would be well aware of their debt. It turns out many of them are clueless about their loans, which only makes it more difficult to pay them down.
How to improve: If you have debt, it's usually in your best interest to pay more than your minimum payment, thereby reducing the length of your loan and the amount you pay in interest. If you aren't sure where to start, consider the advice 13 real people who paid off thousands.
You also want to be clear about the interest rate on your debt, as that could affect how quickly you're aiming to pay it off. If your interest rate is close to zero, you may not feel the same urgency to pay it faster than the normal repayment schedule, as it's costing you less than the higher-interest debt.
3. Spending unnecessary money on the short term
Earning a first paycheck is liberating and thrilling, but it can be dangerous. As earnings go up, purchases tend to creep up as well -- and the ease of swiping a credit card for a taxi, morning latte, or restaurant bill doesn't help.
If you're an overspender lucky enough to avoid taking on debt, you're most likely living paycheck to paycheck. That makes it hard to plan and set aside money for the future, when you want to make a major purchase like a house, take a trip, or retire.
How to improve: Moderation is key, here. There's no problem with the occasional drinks out, Uber ride home, or latte when you can afford it, but if you find yourself doing them all the time and feeling a little tight in the wallet, it might be time to find some alternatives -- even those as simple taking the subway (if you live in a city with adequate public transit), walking, and packing a lunch.
If you're trying to break the habit of overspending, read up on the most common psychological overspending triggers, how stores trick you into parting from your cash, and what you can do to keep from spending.
4. Not establishing credit
Your credit score is a three-digit number between 301 and 850 based on how you've used credit in the past -- the higher your number, the better. Generally, you don't want your credit score to dip below 650, as potential creditors in the future will consider you less trustworthy and less deserving of the best rates.
While often overlooked or forgotten about, building good credit early on is essential. It will allow you to make big purchases later on, such as insurance, a car, and a home.
How to improve: Start by selecting a good credit card and then focus on establishing smart credit card habits -- firstly, paying your bill in full every month. Remember, just because you have a credit card doesn't mean you have to use it all the time. Overcharging when you're trying to build your credit can be costly.
5. Relying on credit cards to pay for bills and daily necessities
Having a credit card you use responsibly is great. Using a credit card to make ends meet can lead to trouble.
A survey conducted by the American Institute of Certified Public Accountants found that almost half of millennials surveyed buy necessities such as food or pay utility bills on their cards. Using credit cards isn't necessarily problematic, but if you can't pay the bill when it comes, you might be on a fast track to credit card debt.
How to improve: If you find yourself unable to cover your necessary living expenses without relying on a credit card, it might be time to restructure your budget -- or make one. Not sure where to start? Take a look at the insight offered by 14 regular people who keep diligent budgets. There are also many free budgeting apps to help you categorise and monitor your monthly and annual spending.
If things are getting out of control, you may also want to take a break from your plastic for a while and experiment with the 'cash only diet.'
6. Having no idea where your money goes
You don't quite realise how quickly you can blow through cash until you start keeping track of each purchase. Even the seemingly insignificant 'little' purchases have a way of adding up alarmingly quickly.
And if you redirect the money from these smaller, everyday expenses towards something more productive, like a retirement account, it can accumulate and grow into thousands of dollars over time, thanks to the power of compound interest.
How to improve: Take five minutes each evening to record everything you bought that day.
Recording everything will provide a new awareness of how easily expenses can add up that will help you become more deliberate with each purchase.
6. Waiting until you 'have more money' to invest
According to a UBS Investor Watch report, today's 20-somethings are the most fiscally conservative generation since those born in the Great Depression. Only 28% of millennials look at long-term investing as a path to success. A Bankrate.com survey found that only 13% of Millennials chose the stock market as their preferred way to invest money, while 39% chose cash.
The problem with keeping a disproportionate amount of cash as an investment strategy is that your money is not working for you. While investing can be scary, it turns out that in many cases, the best investors put their money in the market ... and then leave it alone.
How to improve: Retirement savings are one way to invest, but if you want to get more involved, there are other avenues to explore: Start by researching low-cost index funds, which Warren Buffett recommends, or by looking into the low-cost online investment platforms known as 'robo-advisers.'
Also, check out investing basics before diving in.
8. Trying to beat the market
While many millennials don't invest, the ones who do might be doing so a little too aggressively. Data collected by investing app Openfolio shows that out of 2,500 of their users, those under the age of 25 are taking the most financial risk, but receiving returns three times lower than older users who aren't taking on nearly as much. According to the Openfolio data, younger investors often buy stock in 'favourite companies' and try too hard to win big fast.
How to improve: Start thinking about investing as a long-term game, rather than a way to get rich quickly. As Warren Buffett says, 'It's pretty easy to get well-to-do slowly. But it's not easy to get rich quick.' The legendary investor recommends putting money in index funds to grow it slowly and surely.
9. Thinking you're invincible
When you're young it's easy to think you're invincible -- but the fact is, you're not.
This invincibility complex is costly, as medical bills are the biggest cause of personal bankruptcy. It's important to plan for the worst, as an unanticipated emergency could turn your life upside down instantaneously.
In fact, health insurance is mandatory in the US, and people who choose not to have it are required to pay a fee of 2% of your annual household income or $325 per person, per year -- whichever is higher.
How to improve: Buy the insurance that you need. Most financial advisers agree that renter's insurance (if you rent), auto, health, and disability insurance are four must-haves. Check out this young adult's guide to affordable health insurance to get started.
10. Relying too heavily on parents for financial support
Just over half of 18-to-25-year-olds are receiving some sort of financial support from their family, according to a USA/Bank of America Better Money Habits poll -- and 20% of those between the ages of 26 and 34 are still getting help.
Family members are helping with everything, from cell phone bills, to groceries, to clothing, to car payments. One family even refinanced their home to help their son out of a mountain of law school debt.
How to improve: Now that you're an adult, it's time to handle your finances like one. Finding a job and creating an income is a necessary first step, but once you have a steady paycheck, there are some basic strategies you can use to start building wealth and breaking free of your parents' financial support.
11. Trying to show up your friends
You've probably heard of 'keeping up with the Joneses.' Here's the 20-something version of that: choosing where to live, what to wear, where to eat, and what gadgets to buy based on what your friends do.
A survey conducted by the American Institute of Certified Public Accountants found that over three quarters (78%) of 25-to-34-year-olds use their friends' financial habits to determine their own.
How to improve: Be aware of friends who tempt or pressure you to spend too much money. Just because your friend can afford to buy the latest iPhone and live in a high-rent neighbourhood doesn't necessarily mean you can, too. Plus, research has shown that if you and a friend both turn down an expensive purchase you can't afford, it will actually strengthen your relationship.
12. Never giving money a second thought
A study conducted by FINRA found that only 24% of older millennials could answer four or five questions correctly on a five-question financial literacy quiz. That number dropped to 18% for people ages 18-26.
It doesn't help that only 17 states in the US require that students at public high schools take a personal finance class before they graduate.
How to improve: Utilise the abundance of personal finance resources out there to take control of your money. Make sure you know these basic money concepts first. Next, check out the best personal finance books, websites, podcasts, and apps out there to boost your financial literacy.
13. Cheaping out on everything
It's tempting to try to 'save money' by buying inexpensive, low quality things, but oftentimes those cheap products will cost you in the long run.
While it's good to be aware of pricing, sales, and discounts, it's also important to recognise when you're being cheap, rather than frugal. Being cheap means using price as a bottom line, while frugality means using value as a bottom line.
How to improve: By the time you hit your 20s, it's time to start shopping for value, which may mean cutting back on your trips to the dollar store or the cheapest place on the block. There are plenty of everyday items to invest in that can help you save hundreds or thousands of dollars over the months and years, such as a crock pot, commuter bike, and coffee maker.
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