Your twenties are a time of self-discovery.
You’ll finish school, start your career, maybe travel a bit, and learn a lot of lessons while you figure out what you want out of life. Some of those lessons are bound to be money-related, as you’ll start earning some income and consider crossing financial milestones off your list, like buying your first home. Unfortunately, if you aren’t building up good financial habits, you may make some mistakes along the way.
Here are five of the most common money mistakes twentysomethings make – and how to avoid them.
1. Not Having a Budget/Tracking Your Spending
The most common mistake you can make is not having a budget and/or tracking your spending; it’s also the most important foundation skill you’ll learn when it comes to managing your personal finances.
Without a budget, you’ll have no idea how much you earn or spend on a monthly basis, which are arguably the two most important things you need to be aware of. And, if you don’t know where your money’s going, you also won’t know how much you could possibly be overspending each month (therefore going into debt) or where you could cut back if need be.
To avoid making this mistake, search for a basic free budget template on the internet and start plugging in the numbers you know (rent, bills, student loan payments, etc.). Every week, log into your online banking accounts and add the amounts you spent that week. At the end of the month, see how you did. If you went over, don’t beat yourself up – just take it as a learning experience and try again next month.
2. Not Saving on a Regular Basis
If you’re not budgeting or tracking your spending, there’s also a good chance you’re not saving money on a regular basis. That’s a mistake that can cost you a lot of money over the years.
Aside from needing to know where your money is going, getting into the habit of setting some aside every month is another important skill you need to develop. Starting young means the power of compound interest will be on your side. Consider opening a high-interest savings account and start depositing a portion of your paycheque into it. You could also save up and deposit lump sums into GICs (Guaranteed Investment Certificates) with good interest rates.
3. Spending Your Tax Refund
While this next mistake is one you could only make once a year, it’s worth mentioning as it’s more about the mindset than the habit. We know how good it can feel to file your taxes and find out you’re going to get a large refund – especially when you’re a student or recent graduate who’s potentially on a tight budget. However, you shouldn’t think about a refund like it’s free money from the government.
If you’re getting a refund, that actually means you paid too much in taxes, and the government has essentially been borrowing money from you all year and needs to pay you back. Rather than spend your tax refund, the best thing you can do is save your refund. It’s money you weren’t expecting, and therefore weren’t relying on, so add it to your emergency fund or rainy day fund (or retirement fund!) and forget about it.
4. Splurging and Making Impulse Buys
Too many people use YOLO (“You only live once”) as a mindset for why it’s acceptable to buy things they can’t afford. But the damage you can do by splurging is something you could end up feeling the weight of for years to come, especially if you wipe out your savings or go into debt. That’s why it’s important to differentiate between wants and needs.
To avoid making impulse purchases, you can try a few things. First, set up a savings account and deposit extra money into it whenever possible so you can do/buy all the things you want when you have enough money. Second, when you think about buying something, hit pause for 30 days. If you still want it after 30 days, start saving for it. Third, keep a list of things you think you want to get, but are waiting to buy until you have the money. In our experience, by the time you’ve saved up enough, you probably won’t want it and can use the money on things you actually do want instead.
5. Making Minimum Payments on Credit Cards
Finally, we know how easy it can be to fall into the minimum payment trap. The worst money mistake you can make is racking up debt on your credit cards and only make the minimum payment, which is a tiny fraction of the total amount due. If you choose to only pay that amount, you’re essentially only paying off the latest interest charge and a small amount of your principal, which can leave you stuck in the trap for years.
We firmly believe that anyone can use credit cards responsibly, and we know that the best credit cards can offer great rewards for doing so, but it does take willpower. Accessing credit can seem like having free money, but credit cards are meant to help you boost your credit score, not weigh you down with debt. Pay off the balance each month and you won’t find yourself in a bad financial situation.
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