Most people in their early twenties start paying attention to their personal finances, usually because they’ll get their first full-time job or take on new responsibilities like car payments and rent. Unfortunately, no one teaches you how to be smart with your spending habits - not even in schools. But the quickest way to learn is through your own research, as well as by taking advice from professionals or successful role models. But it can certainly be overwhelming to uncover the number of topics you’re supposed to understand. First there’s credit cards, mortgages and loans, then you might want to consider investing and stocks and shares too. If you’re researching personal finance advice for the first time, you must understand the basics before you get carried away with more advanced information. In this article, we will discuss some of the biggest financial mistakes to avoid in your 20’s.
Confusing Good Debt With Bad Debt
It’s rare that people in their 20’s are stuck paying off years and years’ worth of debt, but it can happen, especially if you don’t know the difference between debt that’s good and debt that’s bad. Good debt puts you in a good financial position; typically, you can accumulate good debt through spending on a credit card. If you don’t currently use a credit card and you’re over the age of 20, you may want to consider applying for one. There are a huge number of different credit card providers such as NatWest and Santander, and each will propose different terms and conditions if you were to choose one of their credit card options. Similar to a debit card, your credit card will also have a 16-digit card number associated with it, but also a token, which is a unique random string of characters to improve security for online and mobile payments.
Each provider will share their credit card interest rate with you. This is the amount of interest, as a percentage, that you will pay every year to use their card. This is because they’re lending you an amount of money every month for you to spend. If you choose to spend this money, you will be charged interest, and you are required to pay back what you’ve used once the month is over.
When researching different credit card providers, you should look for the lowest interest rate possible. Most will be very similar, but they will have different terms regarding the maximum amount of money you can spend every month and how much you will be required to pay back. You might be thinking, why would I use a credit card if I'm going to be charged for it? Great question. Well, this is where the ‘good’ debt comes in. By regularly using your credit card and paying off what you’ve spent - on time too — you will accumulate good debt. This is particularly helpful for improving what's called your credit score. You need a high credit score when buying a house, specifically when you apply for a mortgage.
Saving Large And Less Often
It’s likely that as you move into your twenties, you will start earning a full-time wage. What you do with the money that you earn is completely up to you, but it's a good idea to use it wisely and set yourself up for a better and more financially stable future. Savings accounts come in many different shapes and sizes. As with choosing a credit card provider, you will need to select a savings account provider from an extensive list of options. If you want your savings to earn interest, choosing the right savings account provider is an important part of deciding where to keep your money.
Individuals need to start saving their money as soon as it’s possible to do so. Especially in your twenties, when you might be making the most of your youthful years with exciting plans and activities, you never know what financial burdens might unexpectedly appear. One financial setback that can be particularly difficult to manage in your 20s is an unexpected injury, through a car accident, for example. These situations can be extremely expensive, even if the accident was solely the fault of the other driver. You might be expected to cover personal injury solicitor fees, and without a savings account, you might find yourself in a difficult position to do so.
Savings accounts allow you to be prepared for these moments, and any other circumstances where you’re expected to cover a financial cost you weren't prepared for. The most effective and most manageable way to use your savings account is to deposit an amount that’s small enough that you can commit to it every month. Most people make the mistake of making a large deposit into their savings account, perhaps if they have a quieter month, and they quickly find themselves in a position where they need to retrieve some of their savings. It’s important to only deposit an amount you can realistically maintain each month, as with some savings accounts. This may reduce or restrict the interest you earn if you make withdrawals. If you’re unsure of how much you can comfortably afford to save each month, you can start by making a practice savings account with providers like Monzo, where you can open pots within your current account, and deposit and withdraw money free of charge. You can also set saving targets for each pot or lock it so that you will be prohibited from withdrawing money up to a certain date.
Giving In To Lifestyle Inflation
Lifestyle inflation typically occurs when an individual’s salary increases - perhaps through a promotion or taking on a new job role - and with this increase, the individual increases their spending habits. Of course, it’s only natural to treat yourself to more personal gifts or time with friends and family when you have more money to spend, and you’re completely entitled to do so.
However, if you’re in your 20s and are looking for ways to make the most of every penny you make, you might want to consider changing your spending habits. It’s not to say that you should avoid spending anything extra when you become wealthier, because it's likely that you deserve what you’re being paid for, and what you do with that money is no one’s business other than your own. But it is important to find a balance between enjoying the extra money you have while putting some of it aside to save or invest. This way, you will continue to accumulate wealth, even when your salary doesn’t continue to grow.
It’s a good idea to set yourself a spending limit every week, based on how much money you can afford to spend on leisure activities like going out for food and seeing friends. But above this, you should make sure the first payment that’s made after your wages are transferred is into your savings or investment account, depending on which you choose. Many individuals choose to set up a direct debit where their bank accounts will automate these payments, so you won't be required to remember every month. You may also decide to set yourself a clear financial goal such as buying a house, or putting a deposit down for a mortgage - this way you will have something to work towards and may find it easier to commit to saving every month.
Disclaimer: This article is a guest contribution. The opinions and views expressed are solely those of the author and do not necessarily reflect the views, policies, or position of EnKash
