When you’re in your 20s, it can be difficult to keep one eye on the future when the present already feels out of your control. More than 40% of young adults today are considered underemployed, working in jobs that hardly require a college degree. And college graduates face a crushing amount of student debt ($29,400 on average), while expenses like housing, transportation and health care are only getting more expensive. More than one-third of 18-to-31-year-olds still live at home.
But the good news is that a few key decisions you make in your 20s — from what you study and how much you save to what kind of car you drive and where you live — can drastically improve your chances of coming out on top later in life.
Here are common money mistakes you should avoid at all costs:
Choosing the wrong college — and major.
College is still the best possible investment you could make in your earning potential. But it won’t come cheap: average tuition is $38,000 a year. If you’re about to pump that much capital into your education, make sure your future career will pay enough to make it worth your while.
A recent report by the Federal Reserve Bank of New York found that engineering and math majors can expect to get the highest return on their college investment (21% and 18%, respectively), compared to much lower-earning liberal arts (12%) and education majors (9%).
That doesn’t mean you should abandon your dreams of repairing our nation’s broken public education system or winning a Tony — we just don’t know that a $50,000-a-year degree is the wisest way to go about it.
When choosing your major, consider your talents and interests as well as which types of careers are growing in today’s job market. If you’re undecided, don’t rush into a costly four-year program. Enroll at a community college, which will give you time to consider your options and enjoy much lower tuition at the same time. If you’re determined to attend a pricey private university, research the school’s financial aid packages to figure out how much you can expect to cut the cost of attendance. Of course, staying in-state to take advantage of public tuition breaks is never a bad idea, either.
Being too shy to negotiate your salary.
If you don’t negotiate your salary throughout your career, you might as well put $500,000 in a trash can and light it on fire. That’s about how much workers can expect to lose in lifetime earnings if they don’t play hardball at the negotiating table, according to Salary.com.
When you’re straight out of college applying for entry-level gigs, there may be fewer opportunities to negotiate. It can never hurt to ask a hiring manager if your salary is negotiable. The worst thing they can do is say no if the position’s salary is predetermined. If you are given the chance to negotiate, make sure you have an idea of what your position typically pays in your city before tossing out an arbitrary number. Check out salary guides on sites like Payscale, Salary.com or Glassdoor.com. Don’t give up if they say your salary isn’t negotiable – you might be able to work out a deal that gives you more extra vacation days or lets you can telecommute on occasion. See 7 great salary negotiating tips here.
Using and abusing credit cards.
Youth and impulsive behavior go hand in hand. Throw a credit card into the mix and you’ve got the makings of a future financial disaster. People in their 20s have the lowest credit scores of any age group (628) and carry more than $23,000 in debt, according to credit reporting bureau Experian.
Running up high credit balances, missing payments and frequently opening new lines of credit can destroy your credit score. And a low credit score can limit your access to loans when you need it most, lead to higher interest rates on things like auto and home loans, and even give future employers reason to doubt you as a job candidate.
Of course, you can avoid credit debt by ditching credit cards altogether — a strategy used by 63% of millennials — but you may miss out on a chance to build your credit while you’re young.
Student loan debt, for example, doesn’t impact your credit score as negatively as credit card debt. You can build up your credit without touching a credit card by simply paying your student loan bill each month. Utility bills count, too. If you’re wary of opening your own credit card, consider becoming an authorized user on your parent’s credit card or taking out a secured line of credit from a local bank.
Mistaking youth for invincibility.
According to a July study by the Commonwealth Fund, nearly 20% of 19-to-34-year-olds were uninsured in 2013. Going without health coverage is financially risky: The uninsured pay for more than one-third of their health care out-of-pocket, according to the Kaiser Family Foundation. Thanks to the Affordable Care Act, it’s possible to piggyback off of your parents’ insurance until age 26. If your employer offers health coverage, take the time to research the different plans available and don’t be shy about asking questions. Choosing the cheapest plan can seem financially savvy, but you may get hit with a prohibitively high deductible. If you’re unemployed or can’t get health care through your job, check out plans on the Marketplace. You may qualify for tax subsidies that would reduce your monthly premium.
Not investing in renter’s insurance.
One of the simplest things you can do to protect your finances in your 20s is to take out a cheap renter’s insurance policy. Your landlord may have an insurance policy for the building, but that won’t include your belongings should anything valuable gets stolen or damaged. Renter’s insurance will replace your belongings in the event of a fire, flood, burglary, or some types of damage. Not all policies are created equal, so choose carefully. A basic policy will cost you between $15 and $30 a month. Start by taking a quick inventory of your belongings and adding up their value — then compare estimates from several different insurers to see what their policies will cost you.
Moving to a town you can’t afford.
We get it. What could be a more anticlimactic way to kickstart your career than by hopping in your car after graduation and parking it in your parents’ driveway?
But hear us out. If financial security is on your list of priorities, taking your entry-level job skills and moving to a top-dollar city straight out of school isn’t the wisest option. Do yourself a solid and take the time to save at least a few months’ worth of living expenses first by living rent-free at Chez Mom and Dad for a few months or even -- gasp -- a year. If the thought of sleeping in your childhood bedroom is too much to bear, consider renting a cheap place with friends while you save.
And if you must — simply must — follow your heart to whatever money-sucking metropolitan strikes your fancy after graduation, at least come up with a reasonable game plan for how you will afford to survive. Avoid broker’s fees by looking for an apartment on Craigslist. Choose a roommate who can hold up their end of the rent. Ditch your car for public transit. If you find yourself using a credit card to pay for Cup O’ Noodle, recognize that you’re in over your head and ask for help.
Try a cost of living calculator to see what you can expect in different cities.
Not saving for retirement.
At the rate health care and housing costs are rising, you’re going to need much more cash when you retire than your parents or grandparents ever had to worry about. The good news is that you have one of the greatest assets of all on your side — time. Thanks to the power of compounding interest, the money you save in your 20s is potentially worth way more than anything you will set aside in your 30s and 40s.
Take our example, Jessica: She’s 22, earning $3,000 a month and decides to save 10% ($300) of her pre-tax salary in a 401(k). If she puts that money into an index fund that we’ll assume earns 6% a year — even if she never gets a single raise or promotion — she will have saved $753,849 by age 65. Now, say she waits to start saving until she’s managed to work her way up and feels more financially stable. Even if she doubles her savings to $600 a month, by the time she’s 65, she will have saved only $317,843. (Do your own compound interest calculation here.)
Start small. If your employer offers a 401(k) plan, sign up for it and contribute at least 6% of your paycheck. Increase your contribution by another percentage point every year. If you switch jobs, don’t forget to roll over your 401(k) balance to your new employer. Maybe you'll wind up saving millions and maybe you won’t — but chances are you’ll be far better off than had you done nothing at all.
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