It’s common to make mistakes when you’re first getting your finances in order, but learning how to manage money early on can help you throughout your life. Brianna McGurran, a personal finance columnist at Nerdwallet.com, shares her tips for avoiding five common money mistakes.
Mistake #1: Not knowing where your money goes
McGurran says the number one mistake people make is not knowing where their money goes after they get their paychecks. They may be aware of basic expenses like rent, but other expenses such as groceries, eating out or travel can really add up if they’re not tracked.
“The first step toward managing your money is giving each dollar a place to go,” McGurran advises. She recommends using the 50-30-20 rule to budget your expenses.
This basic budgeting rule recommends that 50% of your take-home pay go to needs like rent, car payments, and groceries; 30% go toward wants, like a Netflix subscription or concert tickets; and the remaining 20% go toward savings and debt payments.
But remember: These are guidelines, and your allocations may fluctuate depending on your monthly necessities. “It’s more about calibrating those percentages so you’re doing what’s realistic for you,” she says.
Mistake #2: Not having an emergency fund
“You want to have an emergency fund so that you don’t have to put unexpected expenses on a credit card,” McGurran says.
If you have no emergency fund, begin by putting $500 aside and work toward an ultimate goal of saving three to six months worth of basic expenses, McGurran advises.
Your fund can be used for car repairs, medical and dental expenses that aren’t covered by insurance, and other bills you may have in the event you lose your job and don’t have money coming in.
“These are real things you need to pay for; they might not seem like an immediate emergency, but it’s something you can’t avoid and didn’t expect to come up,” McGurran says.
Mistake #3: Not saving for retirement
While it may seem hard to comprehend retirement when you’re first starting out, it’s important to start saving as early as you can to take advantage of compound interest.
“If you start saving for retirement early, you can actually save less now and have more money later, and that’s because your money compounds over time,” McGurran says.
If your job offers a retirement plan like a 401(k) with employer matching, McGurran advises contributing the maximum amount. If your company offers to match 3% of your salary in contributions and you contribute less, you’re leaving money on the table.
“Take advantage of your employer’s generosity — they want you to save for retirement so you should do it,” McGurran says.
If you don’t have an employer that offers a 401(k), considering signing up for a Roth IRA, which is a tax-free individual retirement account. You can contribute a maximum of $5,500 per year and can withdraw your money at any time, tax-free.
Mistake #4: Letting your loans snowball
Student loans are a major factor in getting your finances in shape early on, but missing payments or falling behind on your loan payments can quickly snowball and land you in deeper financial trouble.
McGurran says you should reach out to your lender if you’re having difficulty with your loan payments. You may be eligible to defer your payments or, if you have federal loans, have your payments adjusted to fit your income. If you have private loans, you may be able to refinance them to lower your interest rates and monthly payments.
McGurran recommends targeting the loans with the highest interest rates first in order to save the most money over time.
While paying off your loans is important, McGurran says you should still contribute to your emergency and retirement funds. “It’s really important to have those two things covered—your future self will definitely thank you,” she says.
Mistake #5: Ignoring your finances
While it may seem overwhelming to suddenly have so much financial responsibility, it’s important to take the time to understand your expenses and get them in line.
“Money is really overwhelming, and so it’s okay to feel like you’re lost or you need some help,” McGurran says. “But don’t feel so overwhelmed or confused that you actually ignore your money or your bills altogether.”
Understand your expenses, make a budget, and put some money aside, she advises.
“Take a deep breath and know that it’s going to be okay. You’ll get it under control,” McGurran says.