20s are the time when a lot of individuals transition into new roles and phases and their priorities change, with money management becoming an important concern. As the recent COVID-19 pandemic has taught many, it is always better to be financially aware and be prepared for any contingency.
Learning about financial mistakes to avoid in your 20s is better than being in debt or stressing about money all the time. To be efficient in the matters of money, it is essential to avoid these seven money mistakes in your 20s.
- Spending more than your earnings
Living within your means is a vital step towards building financial security. Resist spending more than you earn and inculcate the habit of saving for a rainy day.
- Not making a budget
When you do not have an unlimited supply of something, it is always a better approach to spend it conservatively. It holds true for money too. Adopt the 50–30–20 rule of money – where you spend 50% of your income on necessary expenses, 30% on your wants or indulgences and put the remaining 20% in savings.
- Not setting a financial goal
Setting a financial goal, be it short-term or long-term, helps you focus on the target and take constructive steps to achieve it. These goals could be anything – from buying a new laptop or planning a solo trip to paying off education loans or planning for retirement.
- No emergency fund plan
Emergencies happen unannounced, and to be prepared for them, you must have some saving, which is known as an emergency fund. This fund helps you to stay stress-free and focus on the situation at hand rather than spending all the time worrying about money and getting into debt. Experts suggest that one should at least have an amount equivalent to their three months’ salary saved as an emergency fund.
- Letting debt spiral out of control
Impulse shopping or purchasing something that is not really needed is a habit that has the potential to throw your finances off track. If you have the habit of constantly using your credit card as a crutch to get by, your debt could spiral out of control before you know it.
- No investments
Saving a part of your income and investing in different avenues is a healthy money management habit that can go a long way in building financial security. With so many options available these days, there is something for every type of investor – whether you are risk-averse or risk-taker, aggressive or conservative.
The most important investment decision you can make is to start now so that you can reap the benefits of the power of compounding on your investments. You need to build a diverse portfolio that not only takes care of your short-term goals but also generates enough to meet long-term goals. Investing in mutual funds and stocks could be one way to achieve this. Before taking the plunge, it is advisable to take professional guidance so that your corpus remains safe and it generates attractive returns.