Poorly-managed finances during your 20s can take its toll on your credit report and make it that much harder to save money for your future. When you don't have your finances under control, you will accumulate debt and learn financial habits that will haunt you for the rest of your life.
Here are six of the worst money mistakes you can make in your 20s:
1. Fueling an overspending habit. Breaking an overspending habit during your 20s can prevent serious money problems later in life. Become a mindful spender and keep track of all your purchases. Do you really need that new pair of shoes? Do you shop as a hobby, as a way to reduce stress or as a cure for boredom? Figuring out the psychological triggers for your shopping sprees can help stop this unhealthy behavior before it gets out of hand.
2. Living without a budget. Knowing how much it costs to live your lifestyle and what expenses you are responsible for every month can help you make better financial decisions throughout your 20s. Update your budget at least once a month, and track your weekly expenditures within the budget so you have a clear picture of where your money is going every month. Review your budget regularly to cut out extra expenses and contribute more toward your savings account when possible.
3. Neglecting student loan repayment and forgiveness programs. About 1.6 million people are eligible to cap their monthly student loan payment at 10 percent of their income by enrolling in appropriate income-based repayment programs. In addition to income-based programs, there are several loan deferment and forgiveness programs designed to make your student loan payments as manageable as possible. With a little research – good places to start are studentloans.gov and the websites of your student loan processors – you can tame that student loan payment and make it fit within your budget.
4. Relying on credit cards to fill income gaps. If you're counting on credit cards to pay for bills or take care of expenses you forgot to budget for, you will be setting yourself up for huge debt problems. Learn to live within your means by taking a close look at your finances with a realistic budget. Cut out extra expenses, like eating out regularly or paying for cellphone services you may not need. Or, consider downsizing your living space to save on monthly bills. Make a budget that allows you to live on a cash-only basis and set those credit cards aside for emergencies.
5. Living without health insurance. Medical bills are one of the biggest causes of bankruptcy in America. No matter how healthy you are, you must be prepared financially for a medical emergency. You never know when a car accident or an unfortunate work injury can wipe out your savings account or leave you with a huge debt load. Make sure you have at least basic health insurance coverage, either through an employer-paid plan, buying your own or staying on your parent's insurance if under age 26. Since you are young and probably healthy, you don't have to get the Cadillac health plans. There are many health plans designed for healthy people at your age group that have low premiums but will at least protect you against catastrophic health problems and emergencies.
6. Trying to keep up with the Joneses. New York Times best-selling author Steven Furtick once said, "The reason we struggle with insecurity is because we compare our behind-the-scenes with everyone else's highlight reel." It's easy to feel financially insecure in today's social media landscape, where every major purchase is announced on Facebook and photos from expensive vacations are shared on Instagram. Don't get lured into that spending frenzy. Your real friends will not care about what kind of cars you drive or whether you have the latest gadget. Figure out your priorities, and don't let other people dictate your financial future.
Sabah Karimi writes for the consumer finance blog Wise Bread, where you can find out how to pay back student loans faster and other financial tips for 20-somethings.