When you make a horrible financial mistake in your teens, it's small potatoes. Who cares if you spent hundreds on Limp Bizkit CDs and concert tickets to the Family Values Tour? You'll clearly earn that back thanks to that plush summer gig at Sunglass Hut. But once you hit your 20s? The stakes are higher, and you can make financial mistakes that will affect the rest of your life.
For a primer on the biggest financial miscues people in their 20s make, we spoke to Eric Roberge, a certified financial planner and founder of Beyond Your Hammock, who advises young people every day on how best to manage their money. Turns out, your starter home might be the start of your decline.
Buying a car you can't afford
Thanks to Hov, it's everyone's dream to drive a car on B.L.A.D.E.'s, but that's not the most practical use of your money. Roberge says that people often get sucked into buying a car with a high monthly payment, but eventually that new-car smell wears off. And you still have to pay $400 a month. Roberge puts it bluntly, "[There are] better things you could be doing with your money."
Thinking your finances don't matter because you're broke
Even if you don't have two pennies to rub together, how you manage even the tiniest bit of money you have is important. "Anyone who has income has cash flow," Roberge says. "You have income and expenses. It's up to you to create a strategy that works for you so that at the end of the month, you have something in your hands that you can do something with." Whether you pay off debt, or save, or invest your money, what you do with every little bit is important.
Not understanding your expenses
There are fixed expenses everyone pays each month -- stuff like food, rent, and gas for your expensive car. Those aren't going anywhere unless you move back in with your parents. Roberge says people often don't realize that all the fun stuff you do is a choice -- getting dinner, traveling, and going out with friends. Once you recognize how much money is left over after your fixed expenses, you get a better picture of how much you're able to save, rather than simply throwing it into the wind by getting bottle service at a club one weekend.
Using a credit card you're trying to pay off
The average US household credit card debt is a whopping $16,140. Based on my personal estimations, much of that is due to spending on Life is Good T-shirts and nacho cheese. Nevertheless, a huge mistake twenty-somethings make is continuing to use the credit card they're trying to pay off. If you don't pay the new charges off fast enough, the credit card companies are hitting you with 20%+ interest charges on those new purchases. "If your goal was to get to a zero balance, you're not getting there. There's a hole in the bucket," Roberge says.
Not taking a matching contribution for your 401k
If the words "401k" and "matching contribution" are foreign to you, let us Rosetta Stone that for you. Many employers offer the ability for their employees to sock away money in a retirement account (called a 401k), and to incentivize them to do so, they offer to match those contributions dollar for dollar up to a certain amount. And yet, people often don't do it. "It's free money!" Roberge says. C'mon, don't say no to free money.
Not putting away any money for retirement
And since Roberge recognizes some employers don't have a 401k option, you can still contribute to an IRA, or Individual Retirement Account. It's best to start contributing to it early, even if it's only a little, to take advantage of the fact that your money has time to grow, and when it does, that larger sum of money can grow. Roberge explains, "If you invest early and often when you're young, it's going to be much easier to satisfy the amount of money you need in your retirement account" when you hit 65 or so. Do your 65-year-old self a favor and start an IRA.
Buying a home
Don't buy a house if you think you have to because you're getting to be older. Roberge often hears something like this from clients: "It's that time in my life where I should be buying a home because I'm wasting my money on rent." The problem is that you don't know if you'll make or lose money on a house. While buying a home can be a good investment, there are factors working against you. Trying to time the real-estate market is tough. And "historical averages of real estate over the last 100 years is 3% growth -- and if you tie in inflation, you really don't make any money," Roberge says.
Believing you must invest right after college
While some people think spending all your money is the way to be, others believe you have to immediately throw it into the stock market or a house to start making McDuck-sized pools of cash. More important than that, Roberge says, is "getting your month-to-month cash flow solidified before you think about where to invest." Once you have a good idea of what you're able to safely invest, you've got plenty of time to consider your options and figure out the right investment.
Not taking advantage of a benefits program
Since people in their 20s often are enrolled in a high-deductible health insurance plan (that health plan's motto is basically "I'm gonna live forever!"), it's a good idea to take advantage of a Health Savings Account, or HSA. It enables you to pay for medical expenses with pre-tax money, and you don't even have to use the money in one year, like you do with a Flexible Spending Account. As you get older, your medical needs typically increase, so there's a 99% chance you'll eventually use this money.