Your 20s can be an exciting time. It’s a period of self-discovery, a time to try new things and make new memories. Unfortunately, it’s also a time when many people make financial mistakes that can haunt them for the rest of their lives. Let's talk about the top eight financial pitfalls people encounter in their 20s and how to avoid them.
Top Eight Financial Pitfalls-
1. Overspending
Living beyond your means is certain to dig yourself into debt. When you spend more than you earn, you’re essentially borrowing money from your future self. That may not be a problem now, but it will be soon.
To avoid this, create a budget that accounts for all your expenses, and track your spending to make sure you're not accidentally overspending.
For example, Sarah, a recent graduate, loves her daily afternoon latte habit. It costs 5, and while it seems harmless, it adds up to 150 a month, 1,800 a year! By skipping the latte every other day and putting that money towards her emergency fund, she could have a safety net in just a few months.
2. Luxury shopping
When Treat Yourself turns Empty Wallet
Impulse buying can drain your bank account fast, so before making a purchase, take a moment to think about whether you need it. But they're also a critical period for building a strong financial foundation. Avoid certain luxury expenses that can derail your financial progress.
Here are some luxury expenses to avoid-
1. Designer Clothing and Accessories: Opt for affordable options at thrift stores, consignment shops, or outlet malls.
2. Luxury Cars: Consider buying a used car or leasing a car instead of purchasing a new one.
3. High-End Electronics: Buy last year's model or a refurbished device to save money.
4. Fine Dining: Cook at home and experiment with new recipes to save money and eat healthier.
5. Exotic Vacations: Consider more affordable options, such as road trips or camping.
3. Failing to invest
‘Retirement? That's ages away!’ That is what Michael thought. He focused on living in the moment, neglecting the power of compound interest. Years later, Michael faces a harsh reality: catching up is an uphill battle. Don't be like Michael.
Investing may not be on your radar in your 20s, but it should be. The earlier you start investing, the more time your money has to grow. Even small investments can make a big difference in the long run.
Most investment plans work on a systematic investment plan (SIP). This means regularly investing small amounts of money over a set period to generate a sizeable corpus on maturity. The key is to start early and let compounding do its magic.
Apart from that, there are plenty of options available in investing, including, equity, fixed deposits, and more. You can choose the investment management company that suits your risk appetite, and with the rise of fintech, you can even invest from the comfort of your own home.
4. Bad Credit card score
Your credit score is like your financial report card, impacting everything from loan rates to rental applications. Ignoring it is like driving blindfolded. Most of them, have a lack of knowledge about credit scores. Your credit score is a big deal when it comes to your financial well-being, so it's important to know what it is. A bad credit score can make it harder to get loans, apartments, and even jobs. And don't get me started on relying too much on credit cards – it's good to have one for emergencies, but using them too frequently can lead to debt.
Always check your score regularly (as it is available for free), understand its factors, and work to improve it by paying bills on time, probably paying off your balance in full every month. and keeping credit card balances low. Remember, a good credit score is your key to unlocking better financial opportunities.
5. Not Tracking Your Money
Financial Blind Spot: Where Does Your Money Go?
As a young adult, it's easy to get caught up in the excitement of independence and lose track of your finances. Just like a doctor needs your medical history, your finances need a checkup. Here are some questions to ask yourself:
Do you check your bank account frequently?
How much money do you spend on groceries each week?
Have you looked at how much your electricity bill costs month over month?
Keep track of everything you spend money on for a month to get a clear picture of where your money is going. Use a budgeting app or spreadsheet to make it easier. Track your income and expenses (there are even free apps for that). Knowing where your money goes empowers you to make informed decisions.
6. The debt trap
Student loans, car payments, and personal loan debt can quickly spiral out of control and become unmanageable. When you borrow money, you're not just paying back the principal amount but also interest charges, which can add up quickly. This means that the total amount you pay back is often much higher than the original amount you borrowed. Moreover, debt repayment typically involves monthly instalments known as Equated Monthly Installments. (EMI). While it might be tempting to opt for borrowing, as an easy, instant source of funds; these payments can stretch out for years and can put a significant strain on your finances, especially if interest rates are high.
But if you are considering the debt, understand the interest rates, repayment terms, and its impact on your future financial flexibility. Avoid taking on too much debt, like student loans, car loans, or personal loans. If you're already in debt, focus on paying the EMIs off as quickly as possible. Create a debt repayment plan and stick to it.
7. Earning rather than learning
In your early 20s, earning isn't everything. People frequently push themselves in the direction of immediate income under duress, sometimes at the expense of long-term development. While a high-paying job looks tempting, it is wise to prioritize learning valuable skills over immediate gratification.
Invest in your education, attend workshops, and network with professionals in your field. You can strike a balance between earning and learning. Remember, true wealth lies not just in your paycheck but in your ability to adapt and grow in the ever-changing job market.
8. The Goal-less Gamble
If you don't have a clear vision of what you want your financial future to look like, it is harder to make smart decisions about your money in the present. Having clear financial goals is like having a map of your financial journey. For example, if you want to travel the world, buy a house, or do whatever you have been dreaming of, set SMART goals and create a plan to achieve them.
(Specific, Measurable, Achievable, Relevant, and Time-bound)
Without specific, measurable goals, you may struggle to budget, save, and manage your finances effectively. Everybody has different needs and aspirations, which have a unique impact on their financial goals. Take the time to reflect on what you want your financial future to look like. Write down specific goals that you can work towards. Develop an action plan to achieve these goals within a realistic time frame, and will help you to make smart financial decisions today that will benefit you for years to come.
The learning curve
In your 20s, it's crucial to establish a balance between fulfilling your financial responsibilities and creating short- and long-term objectives. You can avoid financial blunders in the future and establish a solid foundation for success by developing good habits.
"Ignorance may seem like bliss, but it's actually a financial nightmare. Tame it young, while you're still young and avoid getting burned."
There you have it, folks – the top financial pitfalls people encounter in their 20s and how to avoid them. Remember, it's never too early to start thinking about your financial future. Stay smart and stay informed, and you'll be on your way to a healthy financial life.
Also Read: Day Trading vs. Gambling: Understanding the Key Differences
