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Common Financial Mistakes made by People in their 20s and how to avoid them

22 February 2013 2 Comments

92296_8905Most people start earning their first regular paychecks in their early 20s. However, their financial education is still that of a teenager. Our education system barely even talks about basic personal financial principles, so it is not surprising that people make a lot of mistakes in their 20s. These mistakes later come back to haunt us as regrets when we are older. However, you can avoid making these mistakes by reading the following points.

Buying Liabilities rather than Assets

For most people in their 20s, the world is filled with attractive and shiny objects that they have wanted to purchase ever since they were teenagers. The newest Apple gadget, the newest mountain bike, or just the biggest TV, all these objects attract us when we have money for the first time in our 20s. However, these objects, as good as they are, are just dead ends when it comes to growing your assets over time. Financially, they are what we should call liabilities. Your latest phone will cost you money on its plan every month, the TV too will cost you money regularly, and the latest mountain bike will require maintenance and storage. Unless these objects change your life significantly, you should buy as few liabilities or objects as possible.

One way to think about each purchase is to calculate how many hours have you worked for it. If there is a $2000 computer you want to buy to play games, and your hourly wage is $40 an hour, then it means you need to work 50 hours to earn that much money. Are you willing to spend 50 hours of your life working just so that you can buy the latest gaming rig?

Not Saving for Retirement as early as Possible

When one is 21, the idea of retirement seems to come from another planet. However, a 21 year old will one day be 60, when he or she will use the money saved as a 21 year old to get by the daily financial requirements. Many people in their 20s do not start saving for their retirement till they are in their late 20s or even 30s. You should avoid this mistake – save for retirement as soon as possible. Learn about 401K plans, and start putting a part of your paycheck in it from your first paycheck.

Falling in the Trap of Credit Card and Student Loan Debt

Student loans are a necessity if you do not have the financial means to pay for your college. However, oftentimes people think that student loans are free money, and start using it to pay for goods and services they are not meant for. It is not uncommon to see people using their student loans to pay for their rent as well as groceries. However, this is not advisable. Student loan is money that you have to pay back someday, and with interest. You should use student loans as sparingly possible.

The same goes for credit card debt. Use your credit card sparingly; in any case, do not fall behind your credit card payments. The first step to financial hell is falling behind in your credit card debt payments.

Not discussing Money with your Partner

Most people are married by their late 20s, and usually they marry someone they love. To talk about money with your spouse seems gauche to many, which is why they never talk about money with their partner. Normally, each partner manages his or her finances, without talking about what they are doing with their finances. Whether they need to keep their finances separate, or combine them to some extent, is a decision that requires open communication. If you are married, you need to start talking about money with your spouse.

The mistakes we have covered in this article are far from exhaustive, but they are definitely made by a lot of people in their 20s, when they have more money than experience in managing money. We hope you will take a cue from one or more of these tips and avoid making these mistakes.


Title..: Common Financial Mistakes made by People in their 20s and how to avoid them
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  • Aram Durphy said:

    Good points. Your second point about not saving for retirement is big issue for young people because compound interest needs time to balloon your investments. I would also note that even more important than a 401k is a Roth IRA when you are young. Due to compound interest, most of your savings will be capital gains at retirement, and with a Roth that will be tax free. Not so with a 401k.

  • George said:

    I think it's absolutely horrible that you have to save for so many years of your life just to avoid poverty – apparently, it's too much for the government to provide elderly people with an allowance….