Figuring out your personal finances is no easy task.
Everyone makes mistakes. It’s just part of life.
Unfortunately, some money mistakes will haunt you more than others.
If you want your finances to remain in tip-top shape in your 20s, 30s and beyond, here are the top 10 money mistakes you should avoid if at all possible.
#1 – Carrying A Credit Card Balance
Carrying a balance on your credit card can be devastating to your finances. Some credit cards charge interest rates over 20% on a regular basis which is just insane.
Yes, sometimes things happen and you have to put a charge on your credit card. However, this should only happen in extreme cases. It shouldn’t be a regular event.
If you are usually carrying a balance on your credit cards, you need to start working to pay your debt off today. We share exactly how you can pay off your debt when you don’t know where to start.
Then, check out mistake #4 to see how you can avoid carrying a credit card balance in the future.
It’s important to note that you shouldn’t swear off credit cards completely if you can control your spending. If you can’t, don’t risk it.
However, if you can, credit cards can be a great tool to build your credit. You can also use them to earn credit card rewards, sign up bonuses and even to travel the world for free.
#2 – Living Paycheck to Paycheck
Living paycheck to paycheck is a reality for most Americans, but it shouldn’t be. If you’re living paycheck to paycheck, you’re setting yourself up for financial failure.
If emergencies pop up, chances are you’ll end up putting that emergency on a credit card and committing mistake #1 again.
Rather than live paycheck to paycheck, you need to take a look at your finances to see where you can cut back your expenses, grow your income and start saving so you can avoid committing mistake #4.
#3 – Not Keeping Track Of Your Money
Most people hate keeping track of their money because they feel like it limits their fun. It doesn’t have to be that way.
Instead, tracking your money can be incredibly freeing. In fact, you can budget to spend money on fun so you don’t have to feel guilty about heading out on the town with friends.
Our worksheet allows you to track your income and expenses so you know how much money is coming in and going out each month. This is super critical because, ideally, you’ll want to make sure you’re spending less than you earn each month.
In addition to tracking your spending and income, you should also track your net worth. Your net worth tracks your overall financial progress in a big picture way.
If you own more than you owe, you’ll have a positive net worth.
Over time, you can watch your net worth grow until eventually you reach financial independence and never have to work a day again in your life if you don’t want to.
If you’re tracking net worth for financial independence purposes, consider tracking your liquid net worth instead of your traditional net worth.
If you’d rather have software automatically track your spending and net worth, you can sign up for a free Personal Capital account today.
#4 – Not Starting Or Keeping An Emergency Fund
Funding an emergency fund should be one of your top priorities in your 20s and 30s.
An emergency fund is your first line of defense to keep you from racking up unnecessary debt when an unexpected major expense or job loss pops up.
Ideally, you should aim to have three to six months of your monthly expenses in your emergency fund. However, in extreme cases, as little as two months of expenses may be enough or you may need as much as a year’s worth of expenses.
Take a look at what possible emergencies could pop up that would derail your finances. Figure out how much money you would need to survive those emergencies. Then, save that much money in cash in a savings account.
The biggest emergency is usually job loss. If it would take a long time to find a new job, sometimes as long as a year, that’s how much money you need in your emergency fund.
However, if you’re in a very in-demand field, other potential emergencies, such as needing to pay your health insurance deductible, could be the biggest item your emergency fund may need to handle.
It’s up to you to determine how big your emergency fund should be, but don’t be overwhelmed by needing to save such a large amount of money if you don’t have an emergency fund at all.
Instead, start small and aim for a $1,000 emergency fund. Once that’s complete, start building your emergency fund in a high yield savings account to the amount you’re comfortable with.
#5 – Not Saving For Retirement
Retirement can seem like it’s forever away when you’re in your 20s or 30s, but that’s actually a good thing if you’re already saving. It’s an awful thing if you aren’t.
Saving for retirement should be a top priority when you’re in your 20s and 30s thanks to the amazing power of compound returns.
An easy way to understand compound returns is the rule of 72. The rule of 72 states if you divide 72 by the annual return you get on your money, your money will double in that many years.
If you can earn 8% on your money, which is expected if you invest broad market index funds and don’t try to time the market, your money would double every 9 years.
That means $50,000 invested at age 30 would be $100,000 at 39, $200,000 at 48, $400,000 at 57 and $800,000 at 66.
Waiting to invest for retirement until you’re 40 makes things super difficult to build up a nest egg. A $50,000 investment at 40 would only be worth about half as much at age 67 due to the missing decade of compounding returns.
It’s difficult to put away money for retirement when you’re young and have so many things competing for your money, but it’s super important to do it.
If you need an easy way to save, use your workplace’s retirement plan.
It will allow you to automatically invest so you never forget. Additionally, many plans allow you to slowly increase your contributions automatically so you don’t end up missing the money.
If you’re lucky and have an employer that matches your retirement contributions, you even get free money to help fund your retirement.
If you don’t have a workplace retirement plan, set up an IRA at a brokerage firm and use their automated investment feature to take money out of your checking account the day after payday.
If you want to invest more than the annual IRA limit, consider opening a regular brokerage account, too.
#6 – Not Diversifying Your Income Sources
Working to further your career is a great option to grow your income. Unfortunately, if all you do is focus 100% on your career, you could end up in a major bind should you suddenly get terminated from your job.
Diversifying your income can happen in many ways and the right way will be different for each person. For some people, side hustling to earn a little bit of extra money is the right answer. For others, side hustling can get you fired.
Find something you enjoy doing that you can make money from that won’t get you fired. You could make money with your woodworking hobby, by freelance writing or by starting a blog.
If side hustling doesn’t sound like it’s for you, work to set up passive income streams from your investments. You can invest to earn dividend income or you could invest in real estate to get rental income.
Whatever you do, don’t rely on one single source for all of your income. If something happens to that income source, you might be in big trouble.
#7 – Buying A Car With A Car Loan
Whenever you buy your first car, I understand the need for a car loan. However, every car you purchase after the first should be car loan free. You should be paying cash for your cars.
Cars are often status symbols and come with insane features that no one really needs. Cars should be used to transport you safely from point A to point B. If you want a fancy car, that’s great, but make sure you’re paying cash for it.
But you may be thinking everyone has car loans. No, they don’t. And you don’t have to, either.
I share exactly how you can make it so you’ll never have another car payment again. If you follow my guide, you can even end up buying luxury cars down the road if that’s what you want.
Not having a car payment will free up your finances to make better financial decisions and allow you to do what you really want with your money.
#8 – Buying The Wrong House
Buying a house is one of the biggest financial transactions you’ll ever make in your life.
There’s no need to rush into these transactions, but many people feel pressured to buy a house as soon as possible. Don’t let it happen to you.
A house should be the most researched purchase you ever make. It’s totally okay to spend days or weeks researching your options, every house and what you want in a house.
Renting isn’t a bad thing. If you aren’t sure you want to live in an area for at least the next five years, you shouldn’t be buying a house.
If your housing needs will change in the next five years, you either shouldn’t be buying a house or you should be buying a house that fits your future needs.
The idea of buying a starter home just to own a home is absurd. It helps real estate agents earn more real estate commissions, but it hurts your financial future.
Instead of hoping to upgrade to a dream home that’s more than you really need, figure out what type of home you really need to raise your family in for the next decade or two of your life and buy that home.
Buying and selling homes is expensive. You have to pay closing costs to the tune of thousands of dollars each time you buy or sell a home. Every time you make a mistake and buy the wrong house, you’re paying those closing costs over again.
Sadly, most people then buy another home with another 30 year fixed mortgage which means they’re not actually paying off a mortgage. Instead, they sign up for another 30 years of being in debt.
#9 – Marrying The Wrong Person
Marrying someone isn’t a financial transaction, but it can be a huge financial mistake.
Unfortunately, way too many marriages end in divorce and divorce is far from cheap. It can destroy your financial foundation and delay your financial goals for years if not decades.
While you thought you were saving for retirement as a couple, divorce will likely split your assets in half and put you behind the game. If you have kids, things can get even messier.
Most everyone goes into marriage with good intentions, but often people don’t go into marriage with their eyes wide open.
Make absolutely sure you and your spouse have had all the major conversations you need to have before you get married. Don’t lie about the answers just to make your future spouse happy. You need to be on the same page.
Have big conversations about your future goals, where you want to live, if you want kids or not, your finances, your credit and any skeletons you may have in your closet.
These things will all eventually pop up and if the answers are surprises, you may find yourself getting a divorce.
#10 – Living Without A Financial Plan
Living without a financial plan for your future may not seem like a big mistake, but it’s a huge mistake.
If you have a financial plan for where you want to be in the future, you’re more likely to apply your money toward meeting those goals. Without the goals, you’ll likely squander your money on forgettable goods and services for years.
A financial plan doesn’t have to be a fancy document completed by a financial advisor. It can be as simple as your plans for the future. Include things like when you want to have kids, buy a house, replace your car, retire, etc.
Figure out how much money you’ll need for each goal and how much to set aside each month to reach those goals by the time you want to accomplish them.
A simple plan like this can help you stay motivated to use your money toward the best purposes according to your plan, not someone else’s.
Did You Make These Mistakes? It’s Ok!
It’s totally alright if you’ve already made some of these mistakes, or even all of them, in your 20s or 30s.
What’s important is how you recover from them. Work to make sure you’ll never make these mistakes again.
If you’re financially behind when it comes toward reaching your goals, hustle to catch up. Money is a tool to help you live your ideal life. Make it work for you, not the other way around.
What is the biggest financial mistake you’ve made in your 20s or 30s? How did you recover from it and what did you learn from it? Share your thoughts in the comments below!
Lance Cothern, CPA holds a CPA license in Indiana. He’s a personal finance, debt and credit expert that writes professionally for top-tier publications including U.S. News & World Report, Forbes, Investopedia, Credit Karma, Business Insider and more.
Additionally, his expertise has been featured on Yahoo, MSN, USA Today, Reader’s Digest, The Huffington Post, Fast Company, Kiplinger, Reuters, CNBC and more.
Lance is the founder of Money Manifesto. He started writing about money and helping people solve their financial problems in 2012. You can read more about him and find links to his other work and media mentions here.