Credit, Loans and Moving Out, Oh My: Common Financial Mistakes People Make in their 20s
Leaving home, graduating from college, possibly even getting married and having kids – the 20s are one of the most exciting and changeable decades you’ll experience. Since we all start with a clean, fresh financial slate at the age of 18, avoiding mistakes during this decade can help you protect your future. Here are some of the most common money mistakes made by young adults – and how to avoid them:
Overcommitting on Student Loans
Student loans are one of the few types of debt that actually offer a fantastic return – a great education. They do have to be paid back, however, and these guaranteed loans are not generally bankruptable if something goes wrong. There are two common mistakes to avoid regarding student loans and either one will cost you in the long run:
Paying too much for the career you’ll have: Getting a 200K education looks great on your resume, and may be unavoidable if you are going into a medical specialty field, but overpaying for your degree can cost you later in life. If the top income for your career is about 60K, but you pay 150K for your education, you’ll be making monthly payments for decades to come. Choose a school and degree that you can truly afford to pay back when you enroll and you’ll protect your financial future.
Putting living expenses on your loans: If you are relying on your loans to live, you’ll be looking at some heavy expenses as soon as you graduate. Use loans for what they are for and avoid the lure of easy money each semester – a part-time job will help you earn money you won’t have to repay later.
Careless Credit Card Use
Whether you’ve been courted by an on-campus credit card offer or applied on your own, overusing credit cards in your 20s can lead to expensive consequences later. A credit card gives you more financial freedom and makes it easier to do everything from traveling to renting a car, but if you over-spend or pay only the minimum amount due on your card, you’ll be paying for that pizza or those new shoes for years to come. Avoid this common pitfall by paying in full each month and not relying on credit as income; if you are living on your credit card, you’re spending too much.
Ignoring Your Credit Score
The way you use credit counts and your 20s is an ideal time to start out with a high score. Your credit or FICO score impacts everything from your ability to buy or rent a home to the cost you‘ll pay for insurance and even the job you can get. If you don’t think about your credit until you need it, you could be in for a nasty shock. Take advantage of your annual free credit report (you’re entitled to one every year), and make sure nothing is lurking there that could damage your score.
Debt On Wheels
One of the first things many students buy when they graduate or when they score that first real job is a new car to match. If you are living at home, that $500 a month payment may not seem like much, but move out and it could impact the home you can buy or rent considerably.
Tax Surprises
That new job sounds amazing, and you’ll even be able to afford a new place, right? Not so fast! The more you earn – and your income will likely explode in your 20s – the more you’ll pay in taxes. Buying a home, car or just planning your budget 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.