Making mistakes is part of life but there are some mistakes that you cannot afford to make — trust me! Therefore, here are 7 money mistakes you must avoid in your 20s!
Mistake #1: Relying on your parents for all your financial advice The first money mistake you must avoid in your 20s is relying on your parents for all your financial advice. You have to understand that your parents are not financial experts and some of their advice could be wrong. Some of the bad money habits that you have today are most likely from your parents and the environment you grew up in. Therefore, if you want to make better financial decisions, you have to change your habits and stop taking every money tips that your parents give you to heart.
Let me give you some practical examples of how most parents think about money and why you should stop relying on them for your financial advice. Some parents think that investing in the stock market is gambling especially those who might have witnessed some stock market crashes and seen all their wealth vanish within a short time.
Another reason why you should not rely on your parents for all your financial advice is that some of them think that insurance is a waste of money. And if you have ever thought of insurance as paying money for nothing then it may be because your parents think the same way too. Some parents wonder why you should have health insurance if you are not sick. More often than not, relying on parents for financial advice is not the advisable more. In fact, studies show that many older have no idea how to plan for retirement or manage their 401(k) account. This said, are these the types of people you want advising you on how to use your hard earned money?
Mistake #2: Ignoring alternate career paths Another money mistake that you must avoid in your 20s is ignoring an alternate career path. Gone are the days when people can stay in a particular job for life. Things are changing now and there are times when it becomes inevitable for you to consider an alternate career path. As technology continues to advance, some jobs are becoming obsolete and new careers are emerging. Your 20s is the best time to see what jobs interest you the most and allow you to chase new trends while your financial obligations are minimal.
Meanwhile, it is okay if you are in your 20s and you don’t know what you want to do with the rest of your life. For most people, this is the decade to explore, learn, and make important decisions about their careers. However, some signs exist that will help you realize you should start looking into other career paths. For example, you may begin to feel disconnected from your current job or lack the enthusiasm you once had. Alternatively, you may hate going to work but keep the job simply because it pays the bills. If any of these red flags resonate with you then you should consider an alternate career path.
Now that you know that you must not ignore an alternate career path, you need to know how to go about it. The first step is to identify what you want. Start by asking yourself some questions. What is your passion? What do you like doing most? What are your skills? These questions will help you identify what you want and the skills needed for it. You may have to learn some of these skills and it may require that you go back to college or university to acquire another degree. Or perhaps the next job or role you want requires you to become an apprentice. The means of learning doesn’t matter, what does is that you get the training needed to successfully do the next job you aim to land!
Mistake #3: Focusing on saving and not investing Your 20s is the best time to start investing, however, most people in their 20s make the mistake of focusing on saving and not investing. Saving money is good but it may not be the best strategy to build wealth. The interest rate that most financial institutions will give you is barely up to the rate of inflation. What this means is that you may end up losing money in the long run by saving because the purchasing power might have reduced. For instance, think of the things that $1 could purchase 10 years ago and compare it with the price today. Do you notice the difference?
When trying to keep up with inflation, investing is a better option when compared to savings. Most people prefer to save money because they don’t know the benefits of investing. Investing has higher returns than saving and this means that your money will not lose its purchasing power. Investing is also an excellent way to grow wealth. For instance, the annual average return of investing in the S&P 500 index has been above 10%. Apart from building wealth, investing your money is a way to make money work for you while you do other things. That is, investing is a source of passive income because some investments such as stocks and bonds pay dividends and interest to shareholders.
Now, don’t get me wrong, saving money is important. It’s important because you need to save to invest. You may even find it difficult to invest if you do not have savings to fall back on in case of an emergency. This is why I always recommend you have 3 to 6 months of your monthly expenses saved in an emergency fund.
Mistake #4: Failing to understand the power of compound interest Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn’t pay it.” He said this because he understood the power of compound interest. One mistake that you must not make in your 20s is failing to understand the power of compound interest.
I will explain to you the power of compound interest by using the following example. Let’s assume you invested $100 in an asset with a 10% interest rate per annum. At the end of the year, you would receive interest of $10 making the total value of your investment $110. If you leave this amount for another year, you would receive interest of $11 instead of $10 making a total of $121. That is how compound interest works. It’s interest growing on top of interest and it’s an excellent way to grow wealth exponentially.
Furthermore, some factors that influence compound interest include the amount invested, the interest rate, and time. Time is one of the most important factors because someone who invested less may make more money if they started investing earlier. If someone invested $100 every month at 10% from age 20 and stopped investing when they were 40, they would have a total of $1,211,036.50 at 70 years old. If another person started investing the same $100 per month at 10% from age 30 and invested until they hit age 70, they would only have $535,636.99.
In short, the earlier you start investing, the more money you are going to make so you need to leverage compound interest if you have yet to start your investing journey!
Mistake #5: Undervaluing yourself on the job market Another mistake that you must avoid in your 20s is undervaluing yourself on the job market. One of the myths of getting a job that people believe is that you must lower your salary expectation to increase your chance of getting a job. While this may seem like a clever means of getting a job, you must not make this mistake.
If you eventually get a job by undervaluing yourself, you may become frustrated by low little money you’re making. Feeling disenfranchised, you your work quality may start to decline which in the worse case scenario will see you losing your job.
Therefore, learn to set realistic goals and don’t take an offer that you may later regret. Before you apply for a job, do your research to understand what others with similar experience and skills earn as a salary. If you do not know the answer to this, you can analyze your skills and determine how much your skills could contribute to the organization you want to work with. This will help guide your application and negotiation process.
A quick tip I like to pass along to my younger peers is to never stop learning. The more you increase your knowledge, the more your value will increase. Learn a new skill, improve an existing skill if possible, or learn a new language. Increase your network both offline and online and finally, don’t be afraid to refuse an offer that is less than what you deserve!
Mistake #6: Maintaining a high credit utilization rate You must not make the mistake of maintaining a high credit utilization rate and hurting your credit score when you’re in your 20s, or at any age for that matter. If you’re unfamiliar with this term, your credit utilization rate is how much debt you owe divided by your credit limit. In other words, if your credit card limit is $5,000 and you have credit card debt of $2,500, your credit utilization rate is 50%. Credit is the measure of credit risk, usually for a consumer, calculated from credit information using a standardized formula. It is a number that lenders use to predict how likely it is that you are going to pay back your loan on time and in full.
One of the reasons why it is important to have a low credit utilization rate is because it is the main driver in calculating your credit score, making up 30% of the total calculation. A lower credit utilization rate means that you are using less of your available credit. This will reflect in your credit score and lenders would assume that you are good at managing your credit by not overspending and may consider you for a loan and this can even lead to preferable interest rates when you do decide to borrow.
Another benefit of maintaining a good credit utilization rate is that it can influence how much a lender is willing to lend you. This is especially important when you are looking to get a mortgage as interest over the course of this loan can cost hundreds of thousands of dollars. Therefore, keep your credit utilization rate as low as possible. The recommended credit card utilization rate is 30% so use this as your benchmark.
Mistake #7: Being too timid to negotiate your routine expenses The last mistake that you must avoid in your 20s is being too timid to negotiate your routine expenses. Most people find it difficult to negotiate anything including their routine expenses. Routine expenses include phone, electricity, and cable bills.
One of the ways to overcome this is by comparing the benefits of negotiating your routine bills and the worst possible outcome of doing so — which is likely just being told no. In many circumstances, you can negotiate down to a lower monthly bill as creditors generally will want to keep your business. If they can’t lower your bill then they may be able to add in other features instead which still leaves you better off than you were before.
Negotiating your expenses will also make you feel good about yourself and can increase your self-confidence. The worst thing that can happen if you negotiate your routine expenses is that you could get a no for an answer. Thinking of the several benefits may motivate you and help you overcome your fear of negotiating.
As you have seen, some financial mistakes can be very costly, hence, you must do everything possible to avoid them!