How to Avoid Financial Mistakes in your 20s

If you’re someone who is winding down, career wise, and are eyeing retirement but aren’t quite sure if you have enough saved or exactly when you’ll be able to stop working, what would you go back and tell your 20-something year old self? Maybe you’ll focus on that additional income, before marriage, mortgages and mouths to feed, and plead with you to do a better job of saving, rather than spending as if you’d never have responsibility beyond 25 years of age.

Some might argue that the 20-something version of themselves didn’t partake in retirement plans then, because who was thinking about life some 30 or 40 years from that date.

No matter the argument or dialogue you’d have with your formative self, you don’t have a time machine, there is no Doc Brown and Marty McFly is fiction at its finest.

So with that, you have an opportunity to avoid those financial mistakes if only to impart wisdom on the younger generation that is in the same position you were three decades prior, perhaps acting as salvation to warn them that being young, doesn’t have to come with bad money decisions or the feeling as though money means little, other than a night out when you get to splurge or filling your closet with clothes since rent might not be an expense at the moment.

The mindset of the 20-something year old isn’t one that is all that promising, either, so the fact that managing money in your 20s is paramount would bode well for those who are of that age, circa 2018.

Only 1 in 3 polled in a recent study say they should be financially responsible fully, not until they’re at least 25 years of age, and on top of that, parents are paying for the the bills of said Millennials to the tune of 74 percent of them taking care of debt, among other expenses such rent and cell phone bills.^[1]

The study continues that Millennials are also delaying any sort of money moves that matter when you’re young, such as getting married or buying a home.

That diversion away from such events or purchases would suggest that the average 20 year old isn’t so great with money.

Despite the fact that you’re 20s are considered “lean” as far as how much you should be making, the average income still is $27,456 or $528 per week, and that numbers rises as you reach the age of 30 (25 to 34 is $758 per week or just under $40,000 per year).^[2]

If a 25 year old still lives at home, that $528 per week ($2,112 per month, adjusted with taxes to around $1,600), should work well from a budget standpoint. The 30 percent on average should be put toward housing, and if that’s not part of the equation, that’s roughly $495 in your pocket, with typically needing about 15 percent for food, 10 percent for car, and 10 percent for debt.^[3]

That $495 is significant in that the average amount you should be putting aside at the age of 25 that is dedicated toward a savings account is about 10 percent, so a $40,000 per year job means you should be socking away $4,000 per year.^[4]

What often plagues a younger generation of would-be money savers is the lifestyle piece, often overspending because you have some discretionary income (i.e. that extra $500 that you’re not spending on rent).

The average 25 year old shouldn’t have expenses in total go beyond the 75 percent plateau of your gross income, with about 25 percent of your gross income saved in that time period between 20 and 29 years of age.^[5]

If you’re in your 20s, how are you measuring up? Do you have money saved, are you budgeting properly? If not, here’s what you should be doing to avoid money fails in your 20s, a time when you should be putting aside more money than you’d think.

If you don’t know how to save, ask for help

Whether it is pride or just being foolish or immature, Millennials might want to can the ego and simply ask for help if they’re unsure of what to do and how to save properly.

Based on the fact that 51 percent of Millennials say that they have concerns and stress about money, you’d assume that they’re not really asking those important questions, in addition to another 41 percent saying they don’t know what to do, either.^[6]

The important part of asking questions is the source you’re tapping into, such as a financial planner.

The fee for a planner as a one-time plan setup and setting you in the right direction is between $1,000 and $2,000, with ongoing monthly service available at a cost.^[7]

This might sound counterproductive at first when it comes to saving money but not hiring someone to explain the ins and outs of how to save money for a nominal fee in the grand scheme of your entire financial life is short sighted.

Financial planners, overall and beyond just those in their 20s, are a source of concern for the masses, with 71 percent of people afraid to talk to one, citing about 49 percent of that is cost driven.^[8]

Perhaps the Millennials can change that course of thinking, because being successful with money comes at a price (spend money to make money), and even if you’re investing a thousand dollars, you have to ask yourself at what cost is that going to mean overall when you learn better how to manage the almighty dollar.

Retirement plans aren’t just for the ‘seasoned’ employee

While some Millennials or those in their 20s specifically might think retirement plans are something that can be put off until they get older or have a better job, make more money, etc., that mindset is what is cause for concern when you really think about, financially, where the average 20-something individual is.

Sure, as previously noted, you’re only making about $30,000 per year, but being that putting off marriage and buying a house has become the norm, why not take that lack of expense and responsibility and turn it into money in your pocket.

If your company is offering or has a retirement plan, 401K as part of the package that goes with working there, take advantage of it without question.

Most employers match up to 50 percent of what you’re setting aside in a 401K on a pre-tax basis, with the best investment for ages 30 and younger being more stocks and bonds at an 80 to 20 ratio.^[9]

As far as putting a percentage on the 401K, you really need to go into this endeavor with the idea you should set aside the max amount that your employer will match. If the employer matches 50 percent, for example, at 6 percent then that’s what benchmark you should be aiming for, moving forward.

This example sheds light on why timing and starting early is everything.

At the age of 35, you’ll need to save 16 percent of your income for 30 years to retire safety, on average, at 65, but starting at 25 means you can cut that percent of income in half (roughly 8.8 percent) and still retire at 65 in the same place, having started a decade sooner.^[10]

That leaves you with a lot more flexibility, money wise to not only have a retirement goal in mind but also have additional income to put into a savings account or open another retirement account, IRA for instance, as part of comfortably living in the moment and beyond your working years.

Be smart, prudent with debt and budgeting

One of the biggest mistakes those in their 20s make centers on not tracking expenses or how they’re spending their money in general, but also gathering far too much debt, mostly due to living beyond their means.

This argument and point is separate from student loan debt, although that plays into the budgeting piece.

You should always try to have repayment plans, student loan wise, that are based on income, and that usually settles on about 10 percent of what you make, on average.

As far as amassing debt, living beyond your means and that annual salary previously mentioned plays into that, along with taking the recommended 5 percent you should be spending on entertainment and hitting it much more around 30 or 40 percent.

That number isn’t surprising when you consider about 40 percent of the Millennials overspend in order to keep up with friends, more than anything else. That same study also showed that 39 percent of Millennials are willing to go into debt just to stay running parallel with their group of like-minded, same-aged friends, with 27 percent feeling bad about saying ‘no’ to going out, eating dinner at a restaurant, getting drinks, etc.^[11]

Even more of a concern are the 29 percent of Millennials who say, for example, they buy a brewed coffee at least three times a week, 51 percent go out for drinks once per week and 54 percent eat out nearly every day of the week (3, in this case).^[12]

Those percentages go against the average of most Americans. The 51 percent of ages 25 to 34 who go out for drinks once per week compares to 73 percent of other age demographics who make it a point to do the opposite and not get drinks at all during the week.

That suggests the spending is more predicated on not wanting to be left behind socially versus really any other reason.

While someone in their 20s wants to go down the road of living in the moment and having fun, which is understandable, that mentality only goes so far if you’re creeping up on your 30s and you’re more of a financial statistic with no money saved.

The idea behind urging 20 year olds to save money isn’t so much about being devoid of fun or enjoying your youth.

But when you consider that 72 percent of the average Millennials have less than $1,000 saved and 31 percent have zero dollars, you’d think that trend might continue until you’re about to retire and have far too little to show for it.^[13]

That same study shows that 8 percent of Millennials have about $10,000 stashed away, and that’s a good thing, but with a portion that is far too small to really get overly excited about.

That said, it’s a start in the right direction and implementation of budgeting, retirement account early on and portioning out a percentage of what you’re making for more than just weekend festivities all goes a long way toward not having regret in your 50s or 60s that you wish you could go back and tell your 20-year-old self to smarten up.