6 Major Financial Mistakes to Skip in Your 20s

saving money in your 20s

When I graduated from college, my financial approach could be summed up in three words: Sink or swim.

Like a lot of people, I never got classes in personal finance. When it came to managing money, I was largely on my own.

For many people, financial planning in your 20s involves a lot of trial and error. There are plenty of graduates who’d rather live in the moment and not think about money at all. But saving money in your 20s is key to realizing long-term goals.

Here are six personal finance mistakes people make in their 20s. Read on to learn what bad habits to avoid — and what to do instead.

1. Defaulting on student loans

Defaulting, or failing to pay, your student loans is a major mistake. Federal student loans never go away. If you default, the government can garnish your wages, take your tax refund, and cut into your Social Security benefits.

The government could also sell your loans to collections agencies. Debt collectors can be ruthless about harassing you for repayment. Even worse, if you don’t pay back private student loans, the lender could sue you.

Meanwhile, your credit score will tank, making it difficult to rent an apartment, buy a house, or ever get another loan.

Student loans can be a huge burden, but there are options for managing them. You can try out different approaches, like an income-based repayment plan. If you work in public service, you could be eligible for loan forgiveness after a certain number of years.

2. Failing to open a retirement savings account

When you’re figuring out your career, you’re probably not thinking about retirement. However, investing in your 20s is the best time to save money for Future You. Starting early will help you take full advantage of compound annual growth.

Let’s say your retirement savings account grows at a rate of 5.7% every year. You start with a deposit of $500 and add $100 a month after that. After 10 years, you’ll have $17,281. After 20 years, you’ll have $46,494, and after 30, you’ll have $97,347. The earlier you start saving for retirement, the better.

To open an account, choose a provider and set up automatic monthly payments. You can set it and forget it. Meanwhile, your savings will be quietly growing.

3. Using only part of an employer 401k match

If your employer offers a 401k match option, do your best to maximize it. An employer match is free money, so you should get the most you can every year.

Let’s say your employer offers a 3% match of your $60,000 salary every year. To get the full match, you would need to deposit at least $1,800 in your 401k — that could be an automatic deposit of $150 each month. If you can afford it, put in even more.

Even though you’re cutting your spending money now, you’ll end up with a lot of savings later by investing in your 20s. Don’t think of this 401k deposit as an expense. You still have your money, you’re just setting it aside and letting it grow for later use.

4. Ignoring your credit score

Your 20s is the time to build your credit score. Factors like credit history and debt repayment determine your credit score.

You can check your credit score for free on a site like Credit Karma. You can also request one free official report a year from each of the three major credit reporting bureaus at AnnualCreditReport.com.

In addition to your credit score, you’ll see a record of your financial history. By reviewing your debt, repayments, and length of credit, you can figure out what steps to take to improve your score further.

You should also avoid damaging your credit score. Late payments, opening and canceling lots of credit cards, and allowing hard credit checks on your account are all actions that can lower a credit score.

5. Taking on credit card debt

Getting into credit card debt is pretty much always a mistake. Credit cards have extremely high interest rates; the national average APR is 15.07%.

If you carry a balance from month to month, then your debt can balloon before you know it. The golden rule of credit card use is this: Don’t spend any more than you can afford to pay off each month.

If you use credit cards responsibly, you can earn great rewards and build your credit score. However, if you use them to overspend, you could dig yourself into serious debt.

6. Spending too much and saving too little

When you’re in your 20s, it’s easy to spend, spend, spend. You’re making more than you’ve earned before and have the freedom to spend it however you want. Whether it’s shopping or social activities, there’s no shortage of opportunities to make it rain.

While spending can feel good in the short-term, it can hurt you in the long run. You may want to save for retirement, buy a house, or travel the world someday. To achieve these goals, curb impulse spending and start saving money in your 20s, instead.

Why is saving money in your 20s so important?

Many of us are figuring out our relationship to money in our 20s. While we’ll make mistakes along the way, we should strive to form a budget and work toward long-term goals.

Your 20s are an excellent time to save and invest. You’ve got time on your side, so your savings can grow a ton over the years. With smart financial planning in your 20s, you can set yourself up for a lifetime of stability.

If you feel like financial planning in your 20s is super boring, maybe you just need some inspiration from Beyonce. See what money advice you can learn from Queen Bey herself.

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