When you’re in your 20s, making regrettable financial decisions may be the last thing on your mind. After all, you’ll never have a better body, higher libido or bigger dreams than in your starry-eyed youth. Yet the personal finance choices you make before you hit 30 can affect you for decades to come.
1. Living off student loans
Taking out as much as you can in student loans is easy. Paying those loans off, not so much. It’s a bad idea to apply for more money than you need so you can buy a car, study on better furniture or live in an off-campus apartment.
Depending on the amount you borrow, you could spend up to 10 to 25 years repaying federal student loans, according to the Consumer Financial Protection Bureau. So, next time you want to spend excess student loan funds on a better lifestyle, deposit that money in savings instead.
2. Failing to repay student loans
U.S. Student loan debt was nearly $1.5 trillion in 2019, with around 11% of total student debt more than 90 days delinquent or in default, according to the Federal Reserve Bank of New York.
If you’re behind on student loan payments or in default, your financial problems will only get worse if you don’t work out an affordable repayment plan.
Delinquent payments or defaulting on the loan can negatively impact your credit score. Meanwhile, compound interest – interest on top of interest – can double or triple the original loan amount.
The government can garnish up to 15% of your wages for repayment, and the IRS can seize your income tax refunds until you’re out of default. If you’re still in default when you retire, the government can garnish up to 15% of your monthly social security benefits.
3. Ignoring your credit score
Making late credit card, student loan, car and other payments more than 90 days late can drop your credit score, the rating creditors review before extending credit. Landlords and employers look at your credit score, too. A good credit score is 670-739 and excellent is 800 and above.
Allow your credit score to drop below 580, however, and you’ll have poor credit, always at the mercy of high-interest creditors eager to prey on your desperation.
4. Choosing bad roommates
Your best friend may be a blast for a night of clubbing, but will she pay rent on time? That guy from school plays a mean game of basketball, but can he hold down a job? Pick a deadbeat roommate and you could pay for it later with your credit score.
That’s because if your roommate falls behind on rent or moves out mid-lease, you’re still on the hook for monthly rent. If you have to pay late or break your lease, that can be a blot on your payment history, which comprises around 35% of your credit score.
5. Neglecting emergency savings
When you squirrel away money into an emergency savings account, you’ve got money to cover car repairs, medical bills, veterinary costs, home repairs and other unexpected expenses that you’d otherwise have to charge on credit cards.
To avoid paying interest on debt racked up for an emergency, sock away at least $1,000, preferably more so you don’t drag credit card debt into the next decade.
6. Financing your life with credit cards
Going out for drinks and dinner every night with friends sure is fun. So is buying stylish furniture, taking frequent vacations and having all the latest electronic devices. Put all that stuff on credit cards, though, and you’ll pay for it later.
When you live beyond your means by financing everything you want with credit cards, you can end up with debt and high interest rates that follow you well beyond your 20s. Fall behind on monthly payments and your credit score can also drop, affecting credit-worthiness later.
7. Overlooking retirement fund opportunities
Beginning to save for retirement in your 20s is smart, since you’ve got decades ahead to build your retirement account. If you’re not taking advantage of an employer’s 401K benefit, especially if the company matches your contribution, you’re missing out on big earnings.
For example, if you contribute $5,500 a year to a retirement account and earn 7% annually, you’ll have around $31,000 after five years, according to the U.S. Department of Labor. Save for 15 years at that same rate and you’ll have $138,000. Keep it up for 35 years and you’ll have around $760,000 saved for retirement.
8. Slacking on financial goals
Want to travel the world, buy a house, have kids, get married or just be financially secure later? Setting financial goals in your 20s motivates you to turn dreams into reality. Now is the time to start saving for a down payment on a house, contribute to a retirement account, build an emergency savings and build your career skill set to earn a higher income.