No one wants to deal with money problems when they get older. But, unfortunately, many high schools and colleges don’t teach teens and 20-somethings how to manage their finances properly.
In fact, the average person under 35 has around $5,800 in credit card debt alone, according to ValuePenguin*. That’s on top of student loan debt, living costs, and other expenses such as car payments or a mortgage.
And although you might think you’re careful with your money by doing things such as setting a budget, there are many smaller financial mistakes you could be making. We reached out to experts to find out some of the most common missteps made in your 20s that can lead to massive debt in your 30s, and how to avoid them.
1. Paying even one bill late
It can be easy to get caught up in life and miss the occasional bill payment. But that innocent act can put you on a bad path.
“Missing one payment on any bill can not only lead to interest charges, late fees, and debt, but to poor credit profiles and scores,” said Kevin Gallegos, vice president of Phoenix operations for Freedom Debt Relief. “To avoid, open all mail (paper and electronic) as soon as it arrives.”
An easy way to ensure you’re paying all your bills on time is to set up automatic payments. Most companies offer this as an option.
If you’re struggling to pay your bills, look to see where you can cut costs in your lifestyle. Or, if you’re burdened with debt from credit card bills and loans, check out debt consolidation companies and student loan refinancing options.
2. Not thinking about your credit score
A credit score is something that might never cross your mind until it’s time to take out a loan. But that’s when it’s too late. Having a low credit score or no score at all could mean you’re not eligible for the money you need to borrow or that you’ll get stuck with high interest rates you can’t afford.
That’s why it’s important to start building a credit history as soon as possible. “You can easily create a strong credit profile that will save you thousands on home and auto loans and insurance,” said Todd Huettner, president of Huettner Capital. “Start with one credit card and put something small on it each month like gas and pay it off each month.”
3. Signing up for subscription services
From movies to groceries, the internet has made it easy to get everything on demand. But that convenience comes at a cost.
“The biggest mistake I made in my 20s wasn’t big purchases but the little things that added up like subscription services,” said Catherine Agopcan, founder of personal finance website Sisters for Financial Independence. “Spending a few dollars a month on Netflix and other services was a huge hidden money drain.”
Not only should you consider your income and big budget items such as rent, but you should also look at charges you’re putting on your credit or debit card. Spending $10, $20, or $30 here and there can add up to hundreds every month. Cancel or stop spending money on anything that’s not essential.
4. Not contributing to a 401(k)
You might think that retirement is something that’s way too far off to worry about. Incredibly, 69% of millennials aren’t saving for retirement, according to a 2017 survey by Earnest.
“One of the single biggest financial mistakes people make especially in their 20s is not contributing to their company 401(k) plan,” said Scott Salaske, investing expert at Firstmetric.
You have the option to contribute to a Roth or traditional 401(k) on your own, but you can up the ante on your contributions if your employer has a matching program. “Sometimes companies match dollar for dollar on a certain percentage of contributions,” added Salaske. That means if you put $100 into your retirement, your company could match a percentage of that.
While this financial mistake won’t put you into debt, you could miss out on free money.
5. Carrying a credit card balance
Credit card debt is a slippery slope. Carrying a balance means you’ll have to pay interest on your debt.
“I was carrying some debt on my credit cards, in addition to taking out student loans,” said smart shopping expert Trae Bodge. “My credit score plummeted. To avoid this, a good habit for people in their 20s is to pay off their credit cards in full every month. If you can’t do it, it means that you are overspending.”
To help you avoid credit card debt, try using Dave Ramsey’s envelope system. With this system, you split your cash between envelopes that are assigned to different expenses, such as gas, groceries, and entertainment. Once the money in an envelope runs out, you can’t spend any more on that expense for the rest of the month.
6. Not having an emergency fund
As a naive 20-year-old, it’s easy to overlook the need for an emergency fund. But that money could save you from going into debt when you have an unexpected expense.
“Most people forget about the unforeseeable costs like breaking a bone or needing to replace a piece of furniture,” said Doug Keller of Peak Personal Finance. “Without an emergency fund, you’re forced to rely on things like credit cards and loans. That’s dangerous.”
You should aim to have three to six months’ worth of expenses in an emergency fund at any given time. This chunk of money could get you through an unexpected financial hurdle.
7. Refusing to talk finances in your relationship
When you’re in your 20s, talking about money with your significant other might not be fun or sexy, but it’s necessary.
“One of the most common financial mistakes is avoiding the money talk with your partner,” said Sam Schultz, co-founder of Honeyfi, a free app that helps couples manage money. “But by regularly talking to your partner about money, you give each other a sounding board for important financial decisions and a support system to help you stay on track.”
In fact, Honeyfi recently conducted a survey of 500 millennial couples. It found that couples who discuss their finances regularly are over 50% more likely to say they’re “extremely happy” in their relationship. Further, they’re 14% less likely to argue about money each month and 37% more likely to say they have a “great” sex life.
8. Not reevaluating your student loans
Student loan debt is an epidemic. Millions of people are bogged down with payments well into their 30s, which is why you should consider refinancing.
“Refinancing your student loans provides the best opportunity to pay them off more quickly and cost-efficiently,” said Carla Dearing, CEO of Sum180, an online financial wellness service. “Refinancing provides you with a single loan with a single monthly payment and a lower interest rate. The lower interest rate means more of each payment is going toward repayment of the balance owed.”
If you decide to take this path, be sure to shop around to get rates from different lenders. It’s smart to compare interest rates to see if you can lower yours. Just remember: While extending your repayment term lowers your payments, you’ll end up paying more in interest over time. Also, refinancing a federal loan into a private one means you’ll miss out on federal protections, such as forbearance.
Don’t let small mistakes ruin your future
You could have the best intentions to save your money and budget properly. But you could still fall for common money traps. Those small mistakes could lead to big consequences later on, so it’s best to take inventory of your financial situation every now and then. Seeing where you’re falling short and excelling is key to ensuring a prosperous future.
*ValuePenguin is an affiliate of LendingTree, Student Loan Hero’s parent company.
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|1 Important Disclosures for Ascent.
Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB). Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. Loan products may not be available in certain jurisdictions, and certain restrictions, limitations; and terms and conditions may apply. Ascent is a federally registered trademark of Turnstile Capital Management (TCM) and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
* Application times vary depending on the applicants ability to supply the necessary information for submission.
2 Important Disclosures for College Ave.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
Information advertised valid as of 4/1/2019. Variable interest rates may increase after consummation.
3 Important Disclosures for Discover.
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5 Important Disclosures for SunTrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
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6 Important Disclosures for LendKey.
Additional terms and conditions apply. For more details see LendKey
7 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
8 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|4.24% – 13.24%1||Undergraduate and Graduate|
|4.07% – 11.32%2||Undergraduate, Graduate, and Parents|
|4.84% – 13.49%3||Undergraduate and Graduate|
|4.50% – 11.35%*,4||Undergraduate and Graduate|
|4.25% – 13.25%5||Undergraduate and Graduate|
|6.08% – 7.22%6||Undergraduate and Graduate|
|3.95% – 9.81%7||Undergraduate, Graduate, and Parents|
|4.45% – 12.42%8||Undergraduate, Graduate, and Parents|