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biggest financial mistakes young adults make

13 Biggest Financial Mistakes Young Adults Make

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When it comes to personal finance, the most common financial mistakes young adults make often have lasting effects on their financial future. These financial mistakes are otherwise avoidable if equipped with the right information, and mindset.

Below are the top 13 financial mistakes to avoid in your 20s if you aim to have a better financial future and stability:

Deferring Life Insurance

Getting life insurance in your early 20s, especially if you’re single isn’t necessarily a top priority, I get it but as a financial advisor, I suggest that you implement permanent life insurance, like universal life or whole life insurance while you’re young and healthy because the healthier and younger you are, the lower your cost of insurance. This means lower premium payments, and participating whole life and universal life insurance policies, when planned right aren’t your typical life insurance policies that only pay out when the life insured passes away, both of these plans have investment or savings component built into them, so you’re not necessarily simply buying life insurance but investing for your future at the same time.

Each plan has its own pros and cons, so be sure to speak to an insurance expert to help you make a better-informed decision.

Not Starting to Save for Retirement Early Enough

retirement plan

One of the biggest financial mistakes young adults make is failing to start saving for retirement early enough. It’s never too early to start saving for retirement, and the sooner you start, the better off you’ll be. If you don’t start saving early, you’ll likely have to save a lot more later on in order to make up for a lost time.

You may have read or heard the cliche as to when the best time to start saving for retirement is, but if haven’t or didn’t really sink in, let me emphasize it in this article…

The best time to start saving for retirement is the moment you earn your first paycheck. The second best time is NOW!

Mind you, a lot of people start late when it comes to getting cash-value life insurance, and starting their retirement plans because none of these things are though in school. Most of us realize that we need to start building assets at mid-age or in our 40s, this means that we have to save more but with all of the obligations we already have at mid-age, most Canadians find it difficult to start saving, let alone invest for retirement.

The biggest reason to start saving now for retirement is due to the magic of compounding returns. When you invest, your money has the potential to grow, and that growth is compounded over time. The earlier you start investing, the longer your money has to grow, and the more time it has to compound.

For example, let’s say you invest $200 per month in a tax-free savings account that earns an average annual rate of return of 7%. If you start investing at age 25, by the time you’re 65, you’ll have $711,532.77.

If you start investing at age 35, you’ll have $344,218.04. By starting just 10 years later, you’ll have less than half as much money saved for retirement.

Not Being Proactive About Their Personal Finances

young female adult calculating personal finance

Another mistake young adults make is not being proactive about their personal finances. It’s important to stay on top of your finances and make sure you’re doing everything you can to save money. Otherwise, you may end up in a difficult financial situation later on down the road.

Learning and researching personal finance is a great way to become more proactive about your money. The internet is a great resource for finding information on personal finance. You can find articles, blog posts, and even books on the subject.

It’s also a good idea to speak with a financial advisor. A financial advisor can help you develop a financial plan that covers loss of or reduced income in case of life events that will prevent you from doing what you do to earn a living and start you off with building an emergency fund as well as your retirement.

Taking on Too Much Debt

young couple worrying about debts

One of the biggest financial mistakes young adults make is taking on too much debt. often, young adults take on debt without fully understanding the implications. This can lead to serious financial problems down the road. If you’re in your 20s or 30s, try to avoid taking on more debt than you can handle.

The number one culprit to the debt trap is a consumer credit card. While credit cards are a neat tool to have to avoid excessive banking charges, and to earn reward points that you can leverage to buy travel or other items, if not used correctly, they can be a huge financial burden.

Carrying a balance on your credit card from month to month is one of the worst things you can do for your finances. Not only will you have to pay interest on the outstanding balance, but it will also hurt your credit score.

The second culprit that puts most young adults in debt is car loans and leases. While a vehicle is a necessity for Canadians, it’s important to only purchase or lease a vehicle that you can afford.

If you’re having trouble making ends meet, it may be time to downsize to a less expensive vehicle. You may also want to consider taking public transportation or carpooling until you’re in a better financial position.

Not paying credit card debts in full and on time

male holding credit cards

When you accumulate too many credit card debts, it can be difficult to pay off the full balance on a monthly basis, so most young adults today end up maintaining credit card balances. As a result, they pay high-interest rates on their credit card balances, which can quickly add up.

If you find yourself in this situation, it’s important to take action and develop a plan to pay off your credit card debt as quickly as possible. One way to do this is by transferring your balance to a low-interest-rate credit card.

Another way to pay off your credit card debt is by making more than the minimum payment each month. By doing this, you’ll be able to pay off your debt quicker and save money on interest.

If you’re struggling to make your monthly credit card payments, it’s also important to speak with a financial advisor. We can help you develop a plan to get out of debt and improve your financial situation.

Not Having an Emergency Fund

emergency fund

One of the biggest financial mistakes young adults make is not having an emergency fund. An emergency fund is a savings account that you can use to cover unexpected expenses, such as a car repair or a medical bill.

Ideally, your emergency fund should have enough money to cover three to six months of living expenses. If you don’t have an emergency fund, now is the time to start one.

Start by setting up a separate savings account specifically for your emergency fund. Then, start setting aside money each month to contribute to your emergency fund.

6. Buying a Home Before They Are Ready

Another mistake young adults make is buying a home before they are ready. Often, young adults feel pressure to buy a home before they are truly ready. This can lead to financial problems down the road, as well as emotional stress. If you’re in your 20s or 30s, it’s important to wait until you are truly ready to purchase a home.

The obvious mistake when rushing to buy a home is not waiting to have enough downpayment to afford the house you want without being house poor. A 20% downpayment is recommended so you don’t have to pay for private mortgage insurance (PMI) and so your payments are more manageable.

Another mistake young adults make when buying a home before they are ready is not considering all the costs associated with homeownership. In addition to your mortgage payment, you will also have to pay for property taxes, home insurance, and maintenance and repairs.

If you’re not prepared to budget for all of these additional costs, you may find yourself struggling financially. Before you purchase a home, make sure you are truly ready both emotionally and financially.

Investing in the Stock Market Without Doing Research

stock market chart

Investing in the stock market can be a great way to grow your wealth, but it’s important to do your research first. Many young adults make the mistake of investing in the stock market without fully understanding how it works. This can lead to financial losses and frustration down the road. If you’re going to invest in the stock market, make sure you understand how it works before you put any money into it.

Basically, there are two ways to invest in the stock market or in the markets in general, one is through a self-directed investment account, and the other is through the help of financial advisors who can help you pick well-diversified stock and bonds portfolios that you can invest in for the long term.

The advantage of a self-directed account is that you can pick specific publicly-traded companies to trade in and if you’re just investing in ETFs (exchange-traded funds, the fees are next to nothing) but then again, you have to make sure that you know what you’re doing, and also have the time to research and understand what you’re getting into.

If on the other hand, you choose to work with an advisor, we can help you create a well-diversified portfolio and automate your investing on a monthly or bi-weekly basis, so instead of trying to understand the markets, you just automate your investing.

Spending More Than They Earn

broke young female adult

As you may already know, it’s important to live within your means and only spend what you can afford. Otherwise, you may find yourself in a difficult financial situation down the road. If you’re in your 20s or 30s, make sure you’re mindful of your spending and only purchase what you can afford. The rule of thumb to avoid spending more of what you make is to stick to the basics and understand that your money in most cases is finite.

Finite means that there’s only a certain amount of it, and if you spend more than what you earn, then you will go into debt. So a good rule of thumb is the 50/30/20 guideline, which suggests that 50% of your income should go towards essentials like rent, food, and transportation; 30% should go towards wants like travel, entertainment, and clothes; and 20% should be saved.

Of course, this is just a guideline and you may need to adjust the percentages based on your own individual financial situation. The important thing is to be mindful of your spending and make sure you’re not overspending.

You can also make use of budget tracker apps like Mint or You Need a Budget (YNAB) to help you keep track of your spending and ensure you’re staying within your budget.

Failing to Plan for Unexpected Life Events

young adult physical rebabilitation

Unexpected life events such as injury, illness, or job loss can happen to anyone at any time. If you’re not prepared for them financially, they can quickly derail your financial plans. That’s why it’s important to have an emergency fund that you can tap into if needed as well as living benefits policies that can cover you while you’re recovering from an injury or an illness.

As you may know, you can’t work if you’re seriously ill or injured, living benefits like critical illness and disability insurance policies can help ease the financial burdens while you’re recovering and can’t work, so you need not worry as to when the next paycheck is coming and instead focus on getting well so you can be back on your feet and doing what you do best to earn a living.

Buying things they thought they need

young female on shopping spree

As a young adult, and finally making a living, there’s a tendency to want to buy things that we thought we need but in reality, we don’t. So before you make any purchase, ask yourself if you really need it or if you’re just buying it because you want it.

A good rule of thumb is the 30-day rule, which suggests that you should wait 30 days before making any purchase. This is to ensure that you’re not impulsive buying and that you really need the item.

Of course, there are some exceptions to this rule like if you need to buy something for an emergency or if it’s a time-sensitive purchase. But in general, the 30-day rule can help you curb your spending and ensure that you’re only buying what you need.

Not Reviewing Their Finances Regularly

budget

Last but not least, one of the biggest financial mistakes that young adults make is not reviewing their finances regularly. This is a mistake because if you don’t keep track of your finances, it’s easy to overspend and get into debt.

So make sure you review your finances at least once a month, if not more often. This way, you can stay on top of your spending, ensure you’re on track to meet your financial goals, and make changes to your budget if needed.

There are many ways you can review your finances. You can use a budget tracker app like Mint or YNAB, you can use a spreadsheet to track your income and expenses, or you can simply sit down with your bank statements and credit card bills and go through them line by line.

The important thing is to find a system that works for you and that you’re comfortable with. Once you find a system that works, make sure you review your finances on a regular basis so you can keep track of your progress and make changes as needed.

Over-spending for a wedding

wedding table

Whether you’re throwing a simple, backyard wedding, or a lavish ball, weddings can be extremely expensive. And while it’s perfectly fine to want to have a beautiful wedding, you shouldn’t overspend and put yourself in debt just for one day.

To avoid overspending, plan ahead and set a budget for your wedding. Then, stick to that budget as much as possible. Keep in mind that there are many ways to save money on your wedding without sacrificing quality or style. For example, you can ask friends and family members to help with the decorations or catering, or you can DIY some of the elements.

Not building a good credit history

credit score scale

While it’s not good to over-spend and digs yourself down into debt, not having a credit history can make it difficult to get approved for mortgage loans or lines of credit in the future when you’re ready to take on these obligations. If you’re in your 20s or 30s and have never had a credit card or taken out a loan, now is the time to start building your credit history.

The best way to build your credit is by using a credit card and making sure you make your payments on time and in full every month. If you’re not sure you can do this, consider getting a secured credit card, which is a type of credit card that requires you to put down a deposit that acts as your line of credit. This way, even if you do miss a payment, you’re not putting yourself at risk of going into debt.

Final Thoughts

The financial decisions you make when you are young can shape your life for years to come. Making the right decisions now will give you the freedom to achieve your financial goals. Choosing the right financial decisions early will help you avoid costly mistakes in the future. If you are a young adult, this is the best time to make good financial decisions.

There you have it–the biggest financial mistakes that young adults make. If you’re in your 20s or 30s, make sure you avoid these mistakes so you can set yourself up for a bright financial future.

What other financial mistakes do you think young adults make? Let us know in the comments below.

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