Ah, to be in your 20s. Brunches are frequent, hangovers are less debilitating, and all the big, serious life stuff seems so far away.
So top off your bottomless mimosa, my friend, because you’ve got absolutely nothing to worry about when it comes to your finances … or do you?
Well, I’ve got good news and bad news.
The bad news is you always need to think about your finances, even when you’re just starting out and don’t have much money to your name yet.
The good news is that just a few action items now can set you up for financial comfort later. The earlier you start, the less catching up you’ll need to do in future decades.
People of all ages make money mistakes all the time, so don’t be too hard on yourself if you haven’t been maximizing every savings opportunity. Just try to avoid these common errors 20-somethings make (40-something you will be glad you did!).
1. Not Saving for Emergencies
Unexpected expenses are how many people suddenly find themselves in debt. In fact, more than half of Americans don’t have the savings on hand to afford a $500 emergency.
Protect yourself by building up a cash cushion. Start by setting aside enough money to cover a month of expenses (rent, utilities, phone, etc.) in a savings account that’s separate from your checking account. Gradually grow that amount to three to six months of coverage.
Find the highest interest rate you can for your emergency savings account. You can compare rates on Bankrate. Online banks like Ally often offer the most competitive rates. Set up an automatic contribution from your checking account so your savings can grow effortlessly.
2. Going Without Health Insurance
You may be young, but you’re not immune from injury and illness. Failing to insure yourself properly can lead to some serious emergency expenses (and four- or five-figure debt).
Don’t go without health insurance! If you don’t get this through your employer, open enrollment is happening now through December 15 on Healthcare.gov.
3. Not Getting Renter’s Insurance
Many renters mistakenly think their landlord’s homeowners insurance policy will protect them, which isn’t true. Renters insurance will help you replace items that are stolen or damaged, and can even help with medical costs if someone is injured in your home. By the way, you might not be covered just because your roommate has their own policy! Look into adding yourself to their policy or getting your own.
What else does renters insurance cover? If something you own is stolen from your car, or your luggage is stolen while you’re traveling, your losses are covered. If your apartment is so damaged that it’s uninhabitable during repairs, your insurance policy would pay for your temporary living arrangements.
Think about how much a fire would cost you: replacing your televisions, computers, furniture, clothing, artwork, and other expensive items (add to that the cost of a few weeks in a hotel). You can’t afford to not protect your rental home. And coverage is cheap — under $300 a year for about $30,000 of coverage! You can also add riders to your policy to for additional coverage for high-value items like jewelry, as well.
4. Not Taking Credit Card Debt Seriously
It’s way easier to pay off $2,000 at age 22 than have it balloon to $20,000 at age 32 and have to address it at that time. Get a second job, work over time, live at home, get a roommate — do what you need to do to knock out that few thousand dollars in credit card debt that is hanging around.
5. Being Lazy About Paying Off Student Loans
If the interest rate on your student loans is above 4% and you’ve already paid off your higher interest rate debt, then start paying off your student loans more aggressively.
A good way to do this is to take the money you used to apply toward your other debt (since you’re already accustomed to not having it available to spend) and apply it toward your monthly student loan payments.
Here’s an example. Let’s say you have a $20,000 student loan with a 6% interest rate. To pay it off in 10 years, your monthly payment would be $222, and you’ll end up spending $6,647 in interest payments over the life of the loan.
If you could increase your monthly payment by an additional $100, you’d shave nearly four years off of your repayment schedule, and pay $2,638 less in interest!
6. Not Building Good Credit
Building a good-to-excellent credit score is essential if you’ll ever take out a loan in the future, whether it’s for a home, car, or small business. Someone might check your credit when you apply to a job, rent an apartment, or even sign up for a cell phone plan. Your 20s are the ideal time to establish good credit habits.
Start with a no-fee credit card. I’m a big fan of rewards cards, but while you’re still getting the hang of using credit, find a no-fee card and make a few small charges each month. This isn’t the time to buy rounds for all your friends — credit cards aren’t free money!
Pay your credit card bill on time and (ideally) in full. This will help raise your credit score and keep you out of debt. When you only make the minimum payment, your interest payments will grow exponentially.
Check your credit report. You can access one free credit report per year from each of the three main credit bureaus. Doing this is especially important after major security breaches like what happened to Equifax. Report any errors you find so your credit doesn’t suffer because of a mistake or identity theft.
7. Waiting to Save for Retirement
When you’re young, you’ve got a nice, long time horizon before retirement. This means that you’re in a unique position to let compound interest grow your money.
Take advantage of employer-sponsored retirement accounts, especially if they come with an employer match. Accounts like 401(k)s and 403(b)s let you contribute pre-tax dollars, which is an additional benefit that will save you on your tax bill. Contribute enough to get the full employer match, with the eventual goal of contributing the max (which for 2018 is $18,500).
Max out a Roth IRA. I like these for younger workers because you contribute post-tax dollars today (while you’re presumably in a lower tax bracket) and can withdraw your money tax-free in retirement. If you meet income qualifications, you can contribute up to $5,500 per year.
8. Keeping Up With the Joneses
This manifests itself differently at different ages. When you’re in your 20s, there’s a lot of pressure to project the image of having your life together. A lot of that pressure, surprisingly, comes from your parents.
The baby boomers came of age in a prosperous time, so by the time they were 30, many were already married homeowners with kids. By the time many millennials turn 30, well, they’re none of those things. And that’s okay! So when your well-meaning relatives bombard you with intrusive questions this Thanksgiving, just smile, nod, and help yourself to more stuffing.
Don’t go into a ton of debt for a fancy car. It’s okay to stick to a more modest (and possibly pre-owned!) car for now. So long as your car is safe and isn’t in such disrepair that you have to pour money into fixing it, you’re doing just fine. You can even skip owning a car for awhile if you live in a walkable city.
Don’t buy a house because “real estate is a good investment” or “renting is throwing money away.” When you’re young, you may need the flexibility to relocate for job opportunities. Owning a home is a huge responsibility that you shouldn’t take lightly.
Take Advantage of Your 20s
You’ll never have another decade filled with so much fun, frivolity, and avocado toast (though avocado toast is equally delicious in your 30s, let me tell you).
This is the perfect time to make some small moves toward growing your net worth. My friends who tell me they’ve got $200,000 or more in their retirement accounts at 35 are usually the ones who started saving before they were 25. Even if you can only set aside small sums each month, that money will make a huge difference in your life in the future.