It’s common to make mistakes in your 20s and 30s, especially financial ones. However, to set yourself up for economic success, avoid these common financial missteps young adults make as early as possible.
By doing so, you can reduce your expenses, diversify your income, and establish healthy financial habits — helping you achieve your short- and long-term financial goals.
Common Financial Mistakes That Young Adults Make
This article covers several financial mistakes to avoid in your 20s and 30s.
1. Depending On Credit Cards
Credit cards can help build your credit and provide you with easily accessible funds.
However, if not used responsibly, these cards can also damage your credit, plunge you into debt and force you into a cycle of paying high interest rates.
Aim to use only 30% of your credit limit and repay your balances in full before the due date to ensure your credit card works optimally for you. This kind of responsible credit management will build a good credit score, not hinder it.
2. Spending More Than You Earn
One of the worst financial blunders you can make is spending more money than you earn. This unhealthy habit can lead to debt, drain your savings, and trap you in a paycheck-to-paycheck cycle even after early adulthood.
Tracking every dollar is an easy way to ensure you’re not spending more than you earn. By getting a clear picture of how your money flows, you’ll know exactly where to make adjustments to lower your expenses and save more money.
3. Not Setting A Budget
Establishing a budget is a key step toward achieving financial freedom. It allows you to control where your money should go.
Don’t spend lavishly without a clear plan for balancing your income with your expenses. This can cause you to overspend and jeopardize your financial health.
If you want a financially stable future, you should know how to set and stick to a budget. Budgeting apps with user-friendly interfaces are readily available online. So, you don’t need to start from scratch or deal with complex financial tools.
4. Not Setting Goals
It’s hard to make financial sacrifices if you don’t know why you’re making them.
Set achievable short- and long-term financial goals for yourself. Doing so will help you stay on track with your financial journey and allow you to assess whether or not you’re making positive progress with your money.
5. Not Earning Money In Your Free Time
Another big mistake young people often make is failing to diversify their income sources. Although a full-time job may be enough to cover your day-to-day expenses and current wants, relying on it alone can leave you vulnerable to financial uncertainty.
For example, if you are laid off unexpectedly, it helps to have a financial cushion while you look for another job. During your free time, consider taking up a side hustle that you enjoy but still earns you money.
6. Not Building A Good Credit Score
Having good credit gives you better access to low-interest rates, easier loan approvals, and the possibility of a higher credit limit. Unfortunately, many young people are still unfamiliar with building and maintaining their credit scores in their 20s and 30s.
If you want a head start on reaching financial freedom, you should build your credit score by following healthy money habits, such as paying the full monthly balance on your credit card instead of just the minimum payment.
Once you’ve established a high credit score, you’ll be able to access and enjoy the financial products and services you need more easily. This includes easier qualification for personal loans or mortgages.
7. Making Large And Unnecessary Purchases
Making large purchases can be exciting, especially for young adults just starting to enjoy their financial independence.
However, if you constantly overcharge your credit card to purchase unnecessary big-ticket items, you’re setting yourself up for excessive debt and high interest payments.
Before buying anything that costs a couple hundred dollars or more, assess whether you need it, whether you can afford it, and whether there are cheaper alternatives.
If you want to buy a specific luxury item, a smart plan is to save up for it over time.
8. Not Having An Emergency Fund
You never know when you’ll encounter a rough patch due to an emergency, such as job loss or medical expenses.
Without an emergency fund, these unfortunate events can dig deep into your finances, disrupting your money allocation and possibly leading to instability.
There’s no strict rule on how much you should save for emergencies, but I always recommend having enough funds to cover at least three to six months of your expenses.
9. Not Saving For Retirement
In your 20s and 30s, retirement feels so far away that you’re likely not considering it yet. However, saving for this phase of life early on is crucial if you want your retirement planning to be manageable, cost-effective and stress-free.
By starting to save while young, you harness the power of compound interest and make it a habit to set aside money in your nest egg. Moreover, you’ll increase your chances of retiring young, as retirement is more reliant on how much you have saved than on your age.
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