Navigating the financial landscape in your 20s and 30s can be challenging, with many individuals under 40 making critical mistakes that could have long-lasting effects on their financial stability. From mishandling credit to underestimating the importance of retirement savings, these errors can significantly hinder wealth accumulation and economic security.
Read on to learn about 11 financial mistakes people under 40 are making.
Abusing Credit Cards
Credit cards can be a valuable financial tool when used correctly, but many young adults fall into the trap of misusing them. According to CNBC, those aged 18 to 29 years have around US$2900 of debt, and those aged 30 to 39 years have accumulated around US$5800 of debt. Credit card balances that carry month-to-month accrue high interest rates that can lead to substantial debt. It’s crucial to understand how interest works and to pay off balances in full each month to avoid this financial burden. Using credit cards for rewards and building a credit score is beneficial only if managed responsibly.
Ignoring Retirement Savings
Many young adults prioritize immediate financial needs over long-term goals like retirement savings. According to a report, 34% of millennials feel they are behind on their retirement savings. Saving early helps you take advantage of the power of compound interest and contributes significantly to your retirement fund. For instance, contributing $200 a month starting at age 25 can grow to over $500,000 by age 65 with an average annual return of 7%. Employers often offer 401(k) plans with matching contributions, which is essentially free money.
Living Beyond Their Means
Living beyond one’s means is a common financial mistake, often fuelled by the desire to keep up with peers or portray a particular lifestyle. This tendency can lead to accumulating debt and jeopardizing financial stability. On average, a US adult has a debt of US$66,772, and 77% of American households have at least some type of debt in the form of credit cards, mortgages, car loans, or student loans. It’s important to differentiate between needs and wants to avoid unnecessary expenses.
Failing To Build An Emergency Fund
An emergency fund covers unexpected expenses such as medical bills or car repairs. According to a survey by Bankrate, 34% of millennials have no emergency savings, the highest of any generation. Without an emergency fund, individuals are more likely to incur debt when faced with financial surprises. It is advisable to save 3-6 months’ living expenses for contingencies.
Not Investing Early
According to a survey by CNBC, Gen Z and millennials want to invest, but they aren’t able to due to the high cost of living. Of the respondents surveyed, 48% did not have enough savings to cover more than two months of expenses. The longer the investment horizon, the more potential there is for growth due to compound interest. Even small, consistent investments can grow significantly over time.
Overlooking Insurance Needs
Insurance is often overlooked by young adults who may feel invincible or prioritize other financial obligations. According to a Bankrate study, 36% of Gen Z and 50% of millennials claim life insurance. Furthermore, Gen Z represents the group with the highest need for more coverage. Health, auto, renters, and life insurance are critical for protecting against significant financial losses. Evaluating personal needs and potential risks can help determine appropriate coverage levels.
Neglecting To Plan For Major Life Events
Planning for milestone life events such as buying a first home, starting a family, or pursuing higher education is often neglected. According to the National Association of Realtors, in 2023, the average age of first-time homebuyers is 35 years. These events require significant financial preparation and planning. Setting specific financial goals and creating a savings plan can help manage these costs.
Underestimating The Cost Of Living
Many young adults underestimate the cost of living and fail to estimate the impact of inflation. In 2022, the monthly inflation rate in the US peaked at 9.1% on a 40-year high. Though the inflation rate came down to 3.1% in 2023, wages have not kept up with the inflation rate, and many Americans cannot afford the same goods and services they are accustomed to. Creating a detailed budget that includes all living costs, such as rent, utilities, groceries, and transportation, and keeping a margin for inflation is essential.
Not Taking Advantage of Employer Benefits
Employer benefits such as retirement plans (SEP IRAs, SIMPLE IRAs, 403(b), and 401(k)s, health insurance, paid vacation days, and wellness programs can offer significant financial advantages, but many young adults do not fully utilize them. Participating in employer-sponsored plans can also provide tax advantages.
Not Building A Good Credit Score
Keeping a good credit score helps you obtain favorable loan terms, rent an apartment, or get a job. Though the average FICO score for millennials is 687, and for Gen Z, it is 665, it is still lower than the national average of 717. Timely bill payments and keeping low credit card balances are critical steps. Avoiding unnecessary credit inquiries also protects the score. Regularly checking credit reports and correcting errors can help maintain a good score.
Overlooking The Importance Of Financial Education And Professional Financial Advice
Many young adults lack basic financial knowledge. Furthermore, many young adults navigate their finances without seeking professional advice, leading to costly mistakes. According to a survey by Bankrate, though young Americans (Gen Z at 76% and millennials at 65%) are more likely to seek financial advice, their top sources for financial advice are friends and family and social media rather than financial advisors. Investing time in financial education or paying for professional advice can pay off significantly. Financial advisors offer personalized guidance and help with budgeting, investing, and planning major life events.