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.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 6.97% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.30% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.47% – 6.30%1||Undergrad & Graduate|
|2.51% – 8.09%4||Undergrad & Graduate|
|3.02% – 6.44%2||Undergrad & Graduate|
|2.69% – 7.21%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|