Your 20s and 30s are an exciting time. You’re starting to build the life you envision for yourself, or perhaps you’re still seeking out new experiences to learn more about yourself and your goals.
These are years when we expect to learn and grow by exploring jobs and careers, cultural experiences, social experiences and other educational opportunities. But too many of us forget to explore and master one of the most critical parts of building the future we want: financial literacy and financial planning.
The result is that many people enjoy their 20s and make important life changes in their 30s (or vice versa) without understanding how best to support their career and personal goals with a rock-solid financial plan. You could end up flying high, but forget to build a safety net!
Here are some key mistakes to avoid as you’re getting started:
1. Letting the Chips Fall Where They May: No Budget
A first job—or second, or third—is a great feeling. You’re earning money and it’s yours to spend. And too often, we spend it until it’s gone. While a budget may sound restrictive, it actually gives you more freedom because it keeps you from overspending in areas you don’t care about so you have the money you need for what’s important. A budget helps you understand where to splurge—on quality that lasts longer, for instance—and where it’s best to economize, such as buying a used car instead of a new one. (For more from this author, see: 3 Ways to Make Budgeting a Success in the New Year.)
2. Keeping Too Low of a Profile: No Credit Rating
Many people just starting out have low credit ratings, or worse, no credit rating at all (if you’ve always used your parents credit cards, for instance). With a low credit score, your costs will be higher for things like insurance, car financing and mortgage rates. Building good credit now, by getting your own credit card and paying it diligently, or even getting a credit-building loan, will establish a good rating that will help you down the road.
3. Putting It off Until Tomorrow: Living on Credit Cards
Credit cards can be a godsend, particularly the ones with loyalty points. But those points pale in value beside the damage that finance charges can do. Do treat your credit cards like a smart way to keep track of your spending, but don’t spend more than you actually have. Paying credit cards off in full each month not only keeps you within your budget and keeps you from accruing finance charges, it also helps you build a great credit rating for when you do need to borrow money. (For related reading, see: 10 Reasons to Use Your Credit Card.)
4. Living on Perks Instead of Salary: Not Paying Yourself First
We’ve all been to that job interview where they say that the salary is low but they have a great exercise room, volleyball team and popcorn machine. That popcorn won’t pay the rent and it won’t pay a down payment when you find that great condo. Create a savings plan and pay yourself first before you splurge on lifestyle perks like vacations and expensive shoes. That plan should include saving for short-term goals, saving for an emergency fund, and starting to save for retirement. While retirement may seem a long way off, the earlier you start, the more you harness the power of compound interest. Make sure your budget includes saving and contributing, on a regular basis no matter how small the amount, to an IRA or 401(k) before you start spending.
5. Living on the Edge: No Emergency Fund
While it’s hard to imagine needing emergency funds when you’re young and just starting out, you never know what the future can bring. Crises like Hurricane Sandy and the 2008 crash left a lot of people struggling without a safety net, but even something as simple as a pet’s sudden illness can present a huge challenge when you’re on a tight budget. Try to start contributing to an emergency fund that you keep in highly liquid funds for when the unexpected happens. (For related reading, see: Building an Emergency Fund.)
6. Playing the Odds: No Health Insurance
Many young people who are in peak health think that they can skip—or skimp—on health insurance. While you may indeed be fit and healthy, that doesn’t protect you from potential sports injuries, appendicitis, bouts with the flu or—perish the thought—a car accident. High medical bills are the biggest cause of personal bankruptcy. Get the best coverage you can afford: you’ll be amazed how quickly it pays for itself.
7. Going With the Flow: Not Setting Financial Goals
“If you do not change direction, you may end up where you’re heading,” goes the famous quote attributed to Lao Tzu. That means it’s a good idea to think about where you’d like to be—in a year, in five years, in 20 years—and make sure that’s the path you’re on. Simple goals like “I want to save $20.00 a week,” or more elaborate ones, like “I’d like to work for myself from a house on the beach,” all begin with awareness and taking the first small steps. Set a few goals; you can always change them later, but if you don’t, you’re drifting without being mindful of where the currents are taking you. (For more from this author, see: Don't Let Emotions Hinder Your Investing Goals.)
8. Taking Your Eye off the Ball: Using a Non-Fiduciary Advisor or Commission-Based Investment Site
It’s never too late to become financially literate. The internet is full of great tips (like these) and sites that can help you organize your finances, and it provides access to a range of advisories. Having a financial advisor guide you is an excellent idea but blindly trusting just anyone can be dangerous. Many non-fiduciary advisors are compensated by the financial products they recommend, products that may not be the best ones for you. Make sure the advisor you consult is a fiduciary, i.e. someone who is legally obligated to only recommend options that are in your best interest.
You’ll enjoy your 20s and 30s even more knowing that you’re also building a solid future.
(For more from this author, see: Do You Need to Change Your Financial Advisor?)
The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.