Entering your 20s comes with a whirlwind of change and opportunity, from leaving home and potentially pursuing higher education to starting careers and even forming families. It's a decade marked by significant milestones and the challenge of establishing financial independence.
As we explore common financial missteps among young adults, it's essential to recognize that not everyone begins this journey from the same starting line. For example, some young adults may be lucky enough for their parents to have paid for all (or most) of their college education. In contrast, others may be responsible for all higher education expenses. Still, others may not choose to attend college - opting to move directly into the workforce after high school.
Regardless of your specific situation, many of the challenges young adults face are similar. Here are some of young adults' most common money mistakes - and how to avoid them.
Student Loans: Opportunity and Risk
Student loans are one of the few types of debt that offer a fantastic return - increased lifetime earning power. However, student loans must be repaid, and unlike virtually every other type of personal loan, they are generally not eligible for dismissal in the event of a severe financial setback such as bankruptcy.
There are two common mistakes to avoid regarding student loans. The first is taking on too much debt relative to your career choice. For example, assuming $100,000 or more in student loans for an entry-level career brings substantial risk, especially if for only an undergraduate degree. Why's that? Federal student loans for undergraduate study max out at just over $30,000 for dependent students and just under $60,000 for independent students. Borrowing more than that means accepting private student loans from a bank, credit union, or other financial institution. These private loans don't include the flexible repayment options of federal loans. They can potentially result in debt that's difficult to manage.
The next mistake some people in their 20s make with student loans is exploring only some repayment options. The default repayment option for federal loans is the Standard Repayment Plan - equal monthly payments over a ten-year repayment period. While the overall cost for this plan is the lowest, the monthly payments start as the highest of all plans. New plans like the SAVE Repayment Plan adjust monthly payments to your income, ensuring that loan repayment doesn't take too much of your monthly income. So, a firm understanding of all repayment options is crucial to making the most of your money in your 20s, especially if you have a lower-paying job or a job with variable income.
Careless Credit Card Use
Overusing credit cards in your 20s can lead to expensive consequences later. A credit card gives you more financial freedom - that's clear. Credit cards make it easier to do everything from traveling to renting a car. Still, suppose you overspend or pay only the minimum amount due on your card. In that case, it will take literally decades to repay a credit card debt. Avoid this common pitfall by paying in full monthly and not relying on credit. If you put necessary expenses, like groceries, on a credit card and can't pay the balance in full each month, that's a sign that you may need to reevaluate your spending, income, or both.
Ignoring Your Credit Score
The way you use credit counts, and your 20s is an ideal time to work on building the highest score possible. Your credit score impacts everything from your ability to buy or rent a home to the cost you'll pay for insurance, and it is even commonly reviewed by employers when you apply for a job. It's easy to avoid thinking about your credit score until you need to apply for credit, but being mindful of the importance of your credit score is an important step. To keep on top of your credit, pay all bills on time and take advantage of AnnualCreditReport.com to get free copies of your credit reports (you have three - one from each of the major credit bureaus) every year. Review each report to ensure nothing listed could damage your score, including mistakes and accounts that may have been opened without your permission.
Debt On Wheels
One of the first things many young adults do as soon as their income allows is to finance a new (or used) car. If you live at home with your parents, a $500 monthly payment may seem like a little, but what happens if you move out? Or, if you're already living independently, what else could you do with an extra $500 per month?
Many adults need a car to earn a living, but it's crucial to be mindful of how much you spend on a car. Remember, just because you can "afford" a loan doesn't mean it's the best use of your money.
Tax Surprises
That new job sounds fantastic, and you'll even be able to afford a new place, right? Not so fast! The more you earn - and your income will likely grow during your 20s - the more you'll pay you'll pay in taxes.
Buying a home or car or just planning your budget based on your gross income is a common error; make sure you receive a few paychecks and have an idea of your true take-home income before you commit to a costly mistake.
Some of the best things you can do in your 20s are not active at all – simply avoiding some of the most commonly made financial mistakes will help you avoid costly issues later.
