There are some of the most important money mistakes to avoid in your 20’s.
5 Money Mistakes to Avoid in Your 20’s
This guest post was provided by Jasper Levi Stojanovski at StojFinance.com. StojFinance.com is a personal finance blog with a focus on stock market investment.
As someone who turned 20 years old recently—I know first-hand the sort of mistakes that many 20-year-olds are capable of. And I’m not talking about killer hangovers or getting arrested at a music festival—I’m talking about money!
Your twenties are a time when you are likely taking out student loans, moving out of the home, and getting in the workforce.
It’s important that you become financially educated early—to get started on the right foot and lead a life of success!
In this post, I’ll be exploring 5 money mistakes to avoid in your 20’s.
List of Top Money Mistakes to Avoid in Your 20’s
These are some of the most important money mistakes to avoid.
Not Tracking Your Money
Tracking your money is a great way to reduce spending and avoid ending your month wondering where all your money went.
Avoiding large purchases such as a new car or TV is generally not enough to keep yourself on track financially. And those unaccounted-for daily cappuccinos and trips to McDonald’s will affect you more financially, than you may believe.
Tracking your money is easy in today’s age. Use a free tool like Personal Capital to track all your cash flow, investing and retirement goals.
Tracking Your Money Changes Your Spending Habits
You’ll find that you save more money while operating on a budget. You are going to be more careful with your spending since you have set yourself limits for things like food, fuel and leisure.
Budgeting Relives You of Stress
Setting a budget and tracking your spending will also give you more time to do the things you want. You already know your monthly living expenses, and what your spending limits are.
This gives you more time to focus on the important stuff, including things like work, golf, family and whatever else you’d rather be doing.
You’ll find that you have more money left over at the end of the month—and have the freedom to make purchases that really matter—when you track your spending.
See Related: How to Save Money on a Night Out
Abusing Credit Cards
I couldn’t have made a list of money mistakes to avoid in your 20’s without including credit cards.
In this section, I’ll teach you what credit cards are, and explore the potential dangers of credit card ownership and misuse.
What Is a Credit Card?
For a small annual fee, credit cards allow you to make purchases with cash as well as extensions of credit. Meaning you’re able to buy stuff you can’t afford—with the promise of paying the money back later.
The more you spend on your credit card, the more the card issuer makes.
Credit card companies are known to offer all kinds of awards in an attempt to get you to rack up more high-interest debt.
What Is the Average Annual Percentage Rate (APR) on A Credit Card?
Credit card debt is one of the highest interest types of debt you can obtain.
According to creditcards.com the average APR on a credit card is 17.64% in the United States (Updated March 20, 2019).
This figure is average only. There are some credit cards charging annual rates of only 8.25%—while others may charge as high as 29.99%!
Keep in mind that only 43.8 percent of credit cards are paid off in full each month in the United States. This means an overwhelming majority of credit card owners are paying these sky-high interest rates every month!
How to Avoid Credit Card Debt
Abusing a credit card is one of the most important mistakes to avoid in your twenties.
And the best thing you can do to avoid abusing a credit card is to avoid getting one in the first place.
Not Getting Renters Insurance
A renter’s insurance policy is a group of coverages designed to help protect you and your belongings.
A typical renters insurance policy will include liability coverage and as mentioned, protection for your belongings. Renter’s insurance will also cover additional living expenses such as a hotel bill if the home you rent becomes damaged or otherwise uninhabitable.
Your liability insurance policy will cover both legal costs and any legal payouts in the situation that you’ve found to be legally liable. However, Intentional damage is not covered by most liability insurance providers.
It’s a good idea to purchase enough renter’s insurance to replace all of your personal possessions in the event of a loss.
It’s also important to remember that many landlords will require proof of renter’s insurance before they allow you to move in.
Your personal belongings typically won’t be covered by the landlord’s property insurance; consequently, forcing you to replace everything in the house in the event of a fire or flood.
While some situations are unpreventable, renter’s insurance will definitely help minimize the impact.
I hope you’ll never have to use it—but if the time comes, you’ll be glad you had it.
Not Saving for Retirement
While retirement is not the first thing on every 20-year-old’s mind, it’s never too early to start preparing.
In fact, the earlier you begin stashing money in your retirement account—the more money you’ll have by retirement. By investing early, you are maximizing the power of compound interest!
Compound Interest is interest paid on the initial principle as well as additional interest that was accumulated on money borrowed or invested. You can achieve this through capital gains realization and subsequent reinvestment or continually reinvestment of interest or dividends. You can use fractional shares to ensure that you are always reinvesting incremental cash flow.
In investing terms, you are gaining interest on the money you originally invested as well as any interest gained through capital gains on your investment.
Let’s pretend you invested $10,000 In the stock market at age 21. And your money grew at historical averages, being about 10% every year.
By age 67, your mere $10,000 investment would be worth over $801,795! If you were to invest an additional $10,000 each year—this figure would be closer to $9,139,057 by the time you turned 67!
Many investment vehicles will help you get the most out of compound interest. Some of these include stocks, bonds, REIT’s and real estate.
It’s never too early to start saving for retirement, and the earlier you start—the better! Here’s a retirement readiness checklist to help you.
Not Having an Emergency Fund
Everyone is going to be forced to deal with an emergency at some point, and that’s why you need an emergency fund.
Money magazine says that 78% of us will experience a major negative event in any given 10-year period. You might lose your job, need an engine replacement for your car, or be forced to deal with a medical emergency.
Whatever the case, your emergency fund has your back.
How Big Should Your Emergency Fund Be?
Dave Ramsey, American radio host and personal finance counselor, believes you should initially try to build an emergency fund of $1000.
I’m not asking you to stash away $10,000 straight away, an emergency fund of just 1000 dollars could make a huge difference.
A $1000 emergency fund could give you the freedom to pay for sudden car repairs with cash and be on your way the next day.
Eventually, however, an emergency fund will ideally be able to cover three to six months of expenses. Dave Ramsey believes that a fully funded emergency fund should be worth anywhere from $5,000 to $25,000—depending on your situation.
Building an emergency fund is a great way to relieve yourself of financial stress—and has the power to turn a financial disaster into a minor inconvenience.
These are five major money mistakes to avoid in your 20’s. I hope you found this article useful and remember—it’s never too late to develop your financial acumen!
Still want more from Jasper? Visit how to invest 1000 dollars and start building wealth today!
- What is the difference between rich and wealthy?
- Proven tips for increasing your net worth
- Income opportunities to achieve financial freedom
Jasper Levi Stojanovski is a 20-year-old man from Geelong, Australia. He has always had an aptitude for math and had memorized the twelve times tables by age nine.
After stumbling upon the stock market, Jasper soon become engrossed. At 20 years of age, he now hopes to follow in his father’s footsteps and pursue a career in finance.
At StojFinance.com, Jasper and his father (Zoran Stojanovski B. Com, CPA) provide the most in-depth personal finance advice—with a focus on stock market investing.