Twenty-somethings can afford to make big mistakes in their finances since they have decades to recover and move forward to financial success.
Or at least that has been the conventional wisdom for many years.
But rather than destroy your financial future just because you can, why not avoid known mistakes from the outset? After all, someone older than you already took the risks, made the mistakes, and paid for it.
With that in mind, here are six things you can damage your financial future in your 20s:
1) Get heavily into debt. Debt isn’t all bad. In fact, you should open a few credit accounts and use them responsibly to build up your credit history so you’ll be able to get a car loan or mortgage when you’re ready for it. But don’t take on more debt than you can handle. If you’re worried about your debts or can’t afford your payments, you probably have more debt than you should.
2) Over-commit to fixed expenses. Fixed expenses are those you have to pay every month regardless of how much you earn. If your income increases in the future, you can ramp up your fixed expenses, but when you’re starting out don’t sign a long-term lease for an apartment you can barely afford or lock yourself into a pricy cell phone plan.
3) Not set aside any savings. Emergencies happen. Car repairs, medical bills, and other unexpected and absolutely necessary expenses can undo your finances in a heartbeat. Be smart. Squirrel away some money for the proverbial bad news or rainy day.
4) Not start investing. The sooner you start investing for your biggest financial goals from buying a house, to starting your own business, or one day retiring from the workforce, the more time you’ll have for those investments to pay off and compound, giving you even more money to invest. Starting early makes it easier to build wealth over your lifetime.
5) Ignore risk. Riskier investments should earn higher returns and the risks you take, whether in stocks, bonds, real estate, or other assets, should be appropriate for your investment time horizon. Educate yourself or work with a financial planner to find investments that have an appropriate risk profile and reward potential. Pay attention to investment expenses, too. An investment that earns high returns isn’t worth much if those returns are wiped out by expenses.
6) Work cheap—or free. Internships and trainee positions might have value for some careers, but these non-jobs can be a bad deal. If you do the work, insist on being paid for your time and labor. If you don’t earn income, you can’t support yourself today much less save or invest for your future. If your employer hasn’t given you a raise in a while—or ever—ask for one and explain why you think you’ve earned it by improving your skills and contributing to the company’s success.