When you're a twentysomething, long-term financial planning is often not a high priority. Fresh out of college, the future can seem so remote and uninteresting. Everything is all about the moment, the here-and-now, the Friday nights with friends and the Saturday nights with your significant other. Tabs at the bar and swipes of the credit card are quick decisions, and are often not thought of again until the bill comes.
Unfortunately, those good times do come to an end eventually. By the time you hit the 30s, a decade of unfocused financial habits can start to take its toll.
That's why it's important to plan ahead. (And really, whatever decade you're on, you can take action to improve your situation so that the later version of yourself doesn't get overwhelmed). In that spirit, here are a few mistakes to avoid in your 20's so you can prosper in your 30's.
1. When Possible, Avoid Deferring Student Loans
It's hard to turn down the option of deferring a loan, but by delaying payment on your student loans, you extend the debt burden into a time when you will be starting a family and buying a house. The sooner those college loans get paid down, the easier it is to manage this next phase of your life. Creditors tend to view student loans as “good debt,” but even so you're best off making a good dent in them before it's time to settle down.
2. Don't Put Off Starting a 401(k)
Retirement may seem too remote to even consider, but if you start a 401(k) with $100 a month at 22 years old, by the time you reach retirement age at 65, you would have $243,000 (assuming a conservative 6% interest rate), as opposed to accumulating just $125,000 if you didn't start until age 32. Basically every 10 years of that $100/month contribution could double your money by 65. While you can't go back in time, this is a case of better now than never. Get your retirement savings going now, take advantage of any employer match, and consider upping your percentage if you already do participate.
3. Avoid Running Up Unnecessary Credit Card Debt
If you were a typical college student, you probably had a credit card before you had your first job. While credit cards serve a valuable service by providing convenience and helping you build a credit history, they can also tempt you into living beyond your means. In our 20's, we generally earn our lowest incomes, which can make our credit card bills seem overwhelming. And that makes it tempting to pay only the minimum balances. However, if you fall into the minimum payment trap, it will cost you lots of interest later on. So whatever age you are now, figure out how to free your future self by coming up with a more powerful debt repayment plan.
4. Don't Forget to Map Out a Housing Strategy
Many us move more frequently in our 20's than any other time in our lives. We move from the crowded comfort of the college dorm rooms to apartment living with roommates. Perhaps those roomies move out, leaving you with the full rent. Or you move in with friends who lose their jobs and rely on your to take on more of the burden. Or you just take on more space than you can really afford because you didn't factor in the cost of utility bills, parking and Internet. Overextending ourselves comes with the territory of youth. The only way past it is to do some tough-love math and figure out what you can realistically afford. Also, it's not too early to start planning whether (and when) you'll want to buy a home someday.
5. Don't Ignore Your Credit History
Late payments, high credit card debt, missed payments. It's easy to damage your credit score while you're trying to establish yourself, especially when you don't even grasp the importance of good credit. But here's why it matters: your score is what lenders use to judge how much they're willing to lend you, how much they'll charge you (interest and fees), and whether they're willing to give you a hand at all. This becomes so important in your 30's if you choose to begin home shopping, looking for a new car, or even starting your own business.
Above all, remember that no one is perfect! Even if you've already made some mistakes, it's not an indication that you can't be successful at managing your finances – on the contrary, it's just a learning experience that will make you that much wiser in the future.
What mistakes did you make (or avoid) in your 20's? Share them in the comments below!
ReadyForZero was created as a way to automatically manage and reduce debt online. In the United States, Americans manage over $11 trillion in personal debt on their own. ReadyForZero can help you better manage credit card, student loan, mortgage, auto loan or other personal debt online - automatically.