16 Money Mistakes to Avoid in Your 20s & 30s

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y and large, most Americans have literacy gaps in their financial knowledge.  This is proven by surveys conducted by numerous firms reporting most candidates to score 60% or less on questions.

The majority of families and households know they need to save money, limit their debt, and save for retirement; yet, according to a Northwestern Mutual study, 21 percent of Americans have nothing saved at all with only a third or less having less than $5,000.

With either parents or the school system failing to teach the basic fundamentals of money, our economy is witnessing the highest levels of debt ever, and it's a global problem.  While we can't resolve the global monetary issues, we can address how our households handle money.

In this article, you will explore 16 different ways to avoid common money mistakes if you are in your 20's or 30's.

1. Spending More than Your Paycheck
2. Delaying to Save an Emergency Fund
3. Borrowing Money from Your Credit Cards
4. Making Minimum Payments on Debt
5. Accumulating Consumer Debt to Buy Things
6. Withdrawing Funds from Your Retirement Account
7. Applying for New Credit Cards
8. Failing to Maintain a Zero-Based Budget
9. Getting a Mortgage You Can't Afford
10. Buying a Car Beyond Your Means
11. Keeping Up With the Joneses
12. Dodging Life Insurance Premiums
13. Shying Away from Investing in Your 401(K) or IRA
14. Avoiding Regular Credit Report Check-ups
15. Not Contributing to Your Child's 529 Plan
16. Becoming a Workaholic & Not Enjoying Your Money

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1. Spending More Than Your Paycheck

Whether you are right out of high school, starting a new career after college, or looking for a second start at life, you must develop good financial habits.  

When you spend more than you make, you only have two options.  The first option is you borrow the money.  
Households will use credit cards or pull from their savings to make up the shortfall.  The second option is to ignore the bill until the following month.  Neither are recommendations and must be avoided at all costs.  

To avoid such mistakes, there are a few steps you can take.  The first step is to establish a solid foundation for handling money and learning to stretch every dollar earned or given.

While many households will assume that the more money you make, the easier it is to practice good financial habits, I've known millionaires who spent millions in a few years into their retirement.  It always comes back to making your money last despite your income.

It can be more of a challenge today as consumers have easier access to their paychecks with apps like Earning and MoneyLion, which are designed as early cash advances.

So how can you live within your means, and how can you live below your income?  The short answer is absolute, you can!
You can live within your mean when you learn where your money is going and start telling your money where it needs to be spent.

You must know your income and expenses.  To accomplish this, you should start list all of your expenses so you can visually see where every dollar is being spent.    

Next, separate your fixed expenses (rent, utilities, student loans, etc.) from your discretionary bills (clothing, entertainment, subscriptions, etc.)  The discretionary bills are ways to cut expenses to ensure you can pay for your fixed expenses. We'll talk about budgeting in a moment and where to save your money.

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debt & credit

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Make your household budgeting easier to track + manage + pay bills + save more money with these online printable templates. 

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2. Delaying to Save an Emergency Fund

Unless you have a crystal ball, you don't know what the future holds.  Not preparing for the unexpected is not financially wise.  So how much money should you have in an emergency fund?  How many months should your emergency fund have?

Popular studies and advisors claim six months, but every household is different.  Every home should save three months' of living expenses if you have a stable income, savings in your 401(k) and retirement, and take a minimalist approach in your spending habits.

If you live a luxurious life or have little to no savings, it is best practice to save up to six month's living expenses with the intent of saving up to twelve months.  

The last resource in temptation should be your credit cards, especially the high-interest ones.  

So, where should you put an emergency fund?  Your safe?  Your savings should be in an accessible account before your fund your retirement account or other savings for future goals.  Try putting your emergency fund into a savings account.  A savings account will earn some interest and will protect your money because it is FDIC insured.  

Avoid putting your emergency fund into a Certificate of Deposit or an investment fund because a CD is typically locked in for a period of time, while investments have the risk of principal loss.


Source: Unsplash

3. Borrowing Money from Credit Cards

Credit Cards can have its advantages from rewards, points, and getting out of tight monetary positions (short-term, that is). Using these tools wisely can help build your credit score, but you need to recognize the risks.


According to Experian, consumers in their 20s have a credit card debt range from $1,881 to $3,927. See how much the average debt is by age. 


For those in their 30s, the range increases from $4,216 to $6,827. Take a lesson from this, "the older you are, the more likely it is to accumulate credit card debt."


With the average credit card interest rate ticking up 17.27% in 2019, it may seem like you can escape the debt apocalypse, but credit debt rising across the nation.


Below is a figure by CreditCards.com, reflecting which states have the most and least burden in credit card debt. 


Would you rather earn or pay 17% on your money?

4. Making Minimum Payments on Debt

Credit card companies make a lot of money from you when you make only the recommended minimum payment.  When you pay only the minimum, you're paying only on the interest and nothing is applied to the principal.  

Not paying on the principal means it'll take longer to pay off your debt.  You are only kicking the can down the road.  Get a plan in place to pay off any debt you owe as fast as possible.

5. Accumulating Consumer Debt to Buy Things

Getting access to credit has never been easier.  Obtaining consumer loans to pay off student loans or credit card debt can be tempting and does have its place if used wisely.  

The real issue with consumer debt is once you get the loan, you pay off a list of debts, but you fall back into old habits.  With access to a full line of credit, because you have no balance on your credit cards, you quickly get tempted with sales and bargains that you haven't budgeted for and not planned.

Change your mindset by recognizing that when taking on more debt, your future earnings and income are now tied to debt payments.  Buying on credit tempts you to spend more than when paying cash for items.  If you can't afford it, don't buy it with credit.

Source: Adobe Stock

6. Withdrawing Funds from Your Retirement Account

You will discover moments in life when you are strapped for cash. Because you are likely living paycheck-to-paycheck as three-fourths of Americans, you probably don't have an emergency fund. When disaster strikes and you need money, you may be tempted to use credit or withdraw from your retirement. 


You must recognize there are immediate costs to cashing out a 401(k). If you are younger than 59 1/2, you will be slapped with a 10% tax penalty. However, if the withdrawal is due to hardship, this may be averted.  


According to Fidelity, "1 in 3 investors has cashed out of their 401(k) before reaching age 59 1/2, often when changing jobs."


The real impact of pulling out funds from your retirement is the difficulties in replacing it and losing the ability for your earnings to accumulate additional earnings. 


In this instance, you withdraw $50,000 from your retirement fund before turning 59 1/2. Your $50,000 will be taxed with the following:

$5,000 Early Withdrawal Penalty

24% Federal Income Tax (rate may differ) $12,000

7% State Income Tax (rate may differ) $3,500


The withdrawal would cost you $20,500 in penalties and taxes, leaving you with only $29,500.  

Source: Adobe Stock

7. Applying for New Credit Cards

Do you have too many credit cards? And does getting a new credit card hurt your credit score?


Most people apply for credit cards because it lowers their credit utilization. A lower credit utilization improves your credit score, so applying for new cards may be beneficial, as long as you are responsible and maintain a lower utilization rate.


When you apply for a new credit card, your credit score does take a hit. Applying for new credit will cause your credit score to drop, especially when applying for multiple credit cards in a short period of time.


SmartAsset.com recommends waiting "six months before trying to open another account" when it comes to applying for a credit card.

8. Failing to Maintain a Zero-Based Budget

At the beginning of this article, you learned the importance of living within your means.  You need a plan when it comes to managing your money, and having a budget is your financial road map.

Create a zero-based budget, which is a method of budgeting where every dollar you earn is assigned to a category.  Your budget may have multiple types from an emergency fund, utility bills, rent, groceries, and many others.  

Your budget must never have any excess.  One advantage of using a zero-based budget is if you underspend your monthly budget as a result of lower electricity or grocery bill, the difference should be put into another category.  This can force you to put that difference into your savings or be applied to additional debt.  

A disadvantage of using a zero-based budget is you'll have to make some mental adjustments recognizing there is never ever any additional cash for your frivolous spending. 

Source: Unsplash

9. Getting a Mortgage You Can't Afford

If consumers ever learned a lesson about mortgages, it was during the 2007-2008 recession where many families filed for bankruptcy as a result of mortgages.


While your home is likely to be your biggest purchase, you need to take smart steps to ensure you can afford a home. The sooner you plan and save, the easier it will be to get your dream home. 


Many financial planners and advisors will suggest your mortgage payment shouldn't exceed 30-35% of your income. Some studies will claim 28%, but depending on your debt load, you can use the range from 25%-35%. Go with the lower percentage if you have massive amounts in student loan debt, credit card debt, and consumer debt. If you are debt-free, then you may go as high as 35%, assuming you have the proper down payment. For example, if you make $10,000 per month, your mortgage shouldn't exceed $3,000, 30%. 


For many people who are currently renting, these households have a median income of $37,500 annually, according to Zillow, and 30% of this monthly salary is roughly $1,000 per month. 


It is that much more imperative to save for a home sooner rather than later. Most traditional mortgages require a 20% down payment, and with the national median home value of $229,000, do you have $45,800 upfront?


To determine if you can afford a home, try using Bankrate.com's Home Affordability Calculator. 


Clicking link will direct you to Bankrate.com's Home Affordability Calculator.  This is not an affiliate link.

10. Buying a Car Beyond Your Means

Valuation analysts at Kelley Blue Book report the national average transaction price for new light automobiles was $37,285.


Stretching out $35,000 for 48 or 56 months may sound like a reasonable low monthly payment after getting an auto loan, but can you really afford it?  Truth be told, using a conservative figure of 15% of your monthly income can support the payments of an automobile.  

The real issue isn't can you afford the monthly payments.  It is why are you financing something at three to five percent for several years when it is also depreciating.  Think about this...you are funding an item that is consistently losing value.

According to CarsDirect, "a new vehicle depreciates 19% in the first year" and "15 percent drop in the second and third years".  A simple math calculation of when you pay interest, and it is depreciating is always a lose-lose situation.  

By starting early, drive a used car you can reasonably afford and is reliable.  When you drive this vehicle for two to three years, putting away your monthly payment into a Certificate of Deposit (CD) protecting the principle savings while earning interest.  You are less likely to pull the funds out and spend it on frivolous items when it's secured in a 6-12 month CD.

Clicking link will direct you to Cars.com's Car Affordability Calculator.  This is not an affiliate link.

11. Keeping Up With the Joneses

Brene Brown claims our culture has a "never enough" problem, and she is right.  As humans, we tend to go with the least resistance and therefore we adapt.  If our neighbors get a new SUV, we want a new SUV.  If they upgraded their closet to a walk-in, you want a walk-in closet.

With marketing tactics telling you that you need this and that, other sales methods are making it easier to afford such items with easy payments by Affirm and other financing methods.  When you discover "stuff" doesn't bring happiness, you can stop the frivolous spending.  

Dave Ramsey says it best, "Don't go into debt to buy stupid stuff."

Change your mentality that you don't always need the latest and greatest.  From new smartphones to furniture, can you wait a few years longer before upgrading or updating and pay cash for the items?  This is really the best strategy.  When putting things on credit, you are tying your future income to more bills, which decreases your financial flexibility.

If you come across items, you really want and desire, get a savings plan in action and jot it down on your budget so you can reach this goal.  When paying cash and saving money for it, it will bring more satisfaction and joy in the purchase than make credit payments, guarantee!

Source: Adobe Stock

12. Dodging Life Insurance Premiums

It can be difficult finding reasons to put money towards another insurance premium when you don't understand the mechanics. Having a term life insurance policy is essential for several reasons, which you'll discover in a moment, and is more affordable than you think. In fact, if you are healthy, you can typically get a $200,000 life insurance policy for under $30 per month.  


So why do you need life insurance? For starters, the older you get, the more expensive it becomes. By locking in a twenty-year policy with a guaranteed renewable afterward will continue providing low-cost protection in the event, something drastic happens.  


Because in your 20s and 30s, you start to accumulate assets and bills. When you have a spouse and children, you must ensure they are financially secure upon your passing. Having a simple policy in place will help them financially to pay off the mortgage and possibly help with college payments.  


Life insurance is essential for the primary income earner should he or she pass. I've spoken with families who lost a loved one that was the primary earner, and the loss alone caused a massive shift in the family's standard of living. Sometimes, this means the family left behind must sell their home or the widow having to get a job when he or she has been out of work for years with no recent experience.


Don't think you can afford it? You can't "not" afford it! Life insurance is currently at a 50-year low, according to LIMRA. Take care of your family and help them financially succeed, so in the event you or your loved one passes, the money will be the last thing to stress them out or worry. 


Recommended Article:  How Term Life Insurance Can Save Your Family

13. Shying Away from Investing in Your 401(k) or IRA

There is an epidemic in retirement savings when you look at Americans through financial binoculars.  When Transamerica conducted a retirement survey of workers, many were shocked to learn the lack of current retirement savings across all age groups. 


For those in their 20s, only $16,000 has been saved compared to $45,000 for those in their 30s.  At this point, you think it improves significantly by the time one turns 50 or 60.  Only $117,000 (50s) and $172,000 (60s) were saved, which is one's annual salary depending on where you live in the U.S.  This is unsustainable for living 20 to 30 years in retirement.

An important note is to start early and stay consistent.  Ensure you are taking full advantage of your employer's matching 401(k) options because this is free money your employer is giving you.  You should strive to contribute, at least up to the matching amount.  

When you start sooner than later, you establish a foundation for your earnings to start making earnings allowing time for appreciation and dividends to build.   The time value of money works in your favor.

Source: Adobe Stock

14. Avoiding Regular Credit Report Check-Ups

There are multiple reasons why you must check your credit report, and most household don't even check their credit report once a year.  Not only can you check it free once every 12 months, but you take responsibility to ensure your financial health is on track.  

By failing to review and dispute errors, this can cause future issues with creditors when you apply for a mortgage or rent a new apartment/townhome.  

Another reason to conduct regular check-ups is to verify you are not a victim to identity theft.  The sooner you can identify an issue, the faster you can report it and stop the credit fraud.  

Recommended Article: 8 Steps to Achieving an "Excellent" Credit Score

15. Not Contributing to Your Child's 529 Plan

Anytime you can invest and never pay taxes on it can be a great thing.  When it comes to saving for a child or grandchild's college education, 529 plans offer such tax advantages by allowing earnings to grow tax-free if used towards qualified education expenses (tuition, room and board, etc.)

Perhaps you have a spouse looking to get his or graduate degree.  You can use a 529 plan to fund your own continuing education as well if its applied towards an accredited post-secondary institution.  

It is recommended to save for a 529 plan after you have your own financial affairs in order.  If the previous steps have been accomplished, then you should consider establishing a 529 plan.

Source: Wix Photo Gallery

16. Becoming a Workaholic & Not Enjoying Your Money

Now, before you get too excited and start spending every dime you've earned, heed to this advice.  You work hard and take on the rigorous stressors of your job so why not enjoy the fruits of your labor.  If you don't, then what's the point.

Make a conscientious effort in your budget to save for future fun experiences such as traveling, taking a trip, or taking the family somewhere fun where you can take a lot of pictures.  

Research has shown that creating fun experiences has more meaning than just spending money.  Since you've worked hard, make the moments of joy last.

If you can avoid these 16 money mistakes, then you will find yourself in a terrific financial situation by the time you reach your 40s and will definitely be on a financial freedom journey.  It will feel great to know your money situation is leaps and bounds among 90% of Americans.  Let's go!



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