For most people in their 20’s, the only way to discover how to sustain and improve their financial health is through trial and error. Some need to experience failure before they can truly understand how to manage their finances. For those who wish to forgo these mistakes, read the following advice below.
Mistake Number 1 – Overly Excessive Student Loan Debt
As advantageous a college education may be for your career, one needs to understand that there are several financial mistakes that can happen while going to school. These mistakes can have long-term effects on your finances, and prolong you from taking that next step to home ownership in your life.
Mistake: Many kids get accepted to a private school or University and don’t even know what they want to major in. As prestigious as it is to go to one of these schools, many students take more than four years to graduate. This can be because their grades slip while adjusting to a new independent lifestyle, or they decided to switch majors half way through their college career. Nevertheless, tuition at many private schools can be very expensive and leave you in a lot of debt.
Advice: Before enrolling into an expensive school, make sure you know what you want to do. Also, consider taking your general education courses at a State or Community College first. General education courses will be the same no matter where you go to school. Minimize your student loan debt and transfer to the school of your dreams after you have received your Associates Degree. This will allow you time to discover your career path and the freedom to switch majors without already having so much invested in your previous major. Lastly, once you have transferred to the prestigious school of your dreams, you will then receive a diploma at almost half the cost, versus if you had gone there for all four years.
Mistake Number 2 – Not Budgeting
As cliché as creating a budget sounds, it is very beneficial for your financial health. A budget is an overall plan to make sure that you have money for your fixed monthly expenses.
Mistake: People who do not budget can have a tendency to lose track of their expenditures and find themselves not able to pay their bills towards the end of the month. This in return can damage your credit score and cause unwanted late fees. You don’t want to be calculating your bills in you head every week wondering if you have enough to go see a movie.
Advice: Make yourself a budget that will cover your fixed payments and have some money left over for savings and unforeseen expenditures. When you get your paycheck, set aside your budgeted money in a separate “untouchable” account that is specifically for your monthly bills. By doing this you guarantee that you will have enough money for the entire month. As for the leftover money, feel free to do whatever you want with it, even though it is undoubtedly better to save.
Mistake Number 3 – Over Spending
Mistake: People who are new to the workforce can be overly excited once they start getting regular paychecks or a raise. This causes them to overspend on things like leasing an expensive car and moving into a better apartment. As great as all that is, in many cases, decisions like these can cause people to go paycheck-to-paycheck and prevent them from building equity for their future. All the money you spend leasing a car and on rent for an apartment helps someone else get rich, not you. Once your lease is up on both your car and your apartment all the money you invested in those two luxuries just disappears and cannot be used to help you down the road.
Advice: While you are in your 20’s, save as much as possible. Live with your parents or with as many roommates for as long as you can. The less you rent early on, the more you will have to buy with in the future. When it comes to a vehicle, ‘buy’ a reasonably priced ‘used’ car that is a year old. Make all of the monthly payments on time and pay it off as soon as you can. The sooner you pay off things like your car, the sooner you can then sell your car to invest that money elsewhere. This will help you save, it will help you build credit, and allow you to be more eligible to afford a mortgage sooner in your life.
Mistake Number 4 – Not Establishing Good Credit
Your credit score is a three-digit number between 301 and 850 based on your credit spending habits in the past, and the higher, the better. Generally, you do not want your credit score to fall below 650, as potential creditors will consider you less dependable and deserving of certain favorable rates.
Mistake: Younger people who are new to adulthood feel entitled to certain things they have always wanted. With that being said, just because you have a credit card, does not always mean you should use it. It goes without saying; if you do not have the money for a specific item, you should not be buying it. People in their 20’s can sometimes find themselves getting into a lot of credit card debt and spend the rest of their lives paying it off.
Advice: Do yourself a favor and be smart with your credit. Build your credit by making small manageable purchases and pay them off as soon as possible. This will allow you to make bigger purchases later on when you are applying for a mortgage or a loan. Your credit is very fragile; a couple mistakes here and there can make a huge difference down the road.
Mistake Number 5 – No Emergency Fund
It is always wise to have an “emergency fund” in case the worst should happen. While most people try not to even think about the possibility of losing their job, a medical emergency, or their car breaking down, these are all things that can potentially happen.
Mistake: In our youth we feel invincible and have the mentality that nothing bad will ever happen. The problem with that kind of attitude is you don’t prepare yourself if anything bad does happen. You spend your money on different things like vacations and other forms of entertainment rather than saving it to protect yourself if you briefly lose your income. Without an emergency fund, how will you pay your bills if you unexpectedly get laid off from work, or break your leg on a ski trip?
Advice: Before signing a lease, be sure to have a backup plan and an emergency fund that can keep you afloat for at ‘least’ three months. It is recommended to have six months saved, but everyone’s finances are different. Having this emergency fund will help sustain your needs until you find a new job. It also gives you enough time to heal and rehabilitate if you have a serious injury or get sick.
Here at MonsterLoans we understand that for many people, their 20’s is a decade spent learning what it’s like to be an adult. It is a time of great opportunity and a time to live and learn. Some of our greatest memories are when we were in our 20’s but not all are perfect. That is what makes us human. Try to control what you can to better your chances, live your life to the fullest, and plan ahead to achieve the American dream of homeownership.
As always, if you have any questions, or are interested in finding out if you are eligible for a home loan, call us to speak with one of our trained loan professionals.