Four Financial Mistakes You’re Probably Making Right Now
Your twenties are usually the most transformative period of your life. Some people you know will be married with children, some will be jet-setting across the globe and some will be, well, still clinging to their teenage years. One thing’s for sure though, finances are always something to be mindful of, particularly as the habits you form during this stage will likely continue throughout adult life. I want to share the most common financial mistakes people make during their 20s, as learnt from my personal experience, although these are by no means limited to only being in your 20s.
1) Spending on unnecessary things
Most of us overspend on something, whether it’s food, clothes or alcohol. Although at the time the amount you spend seems insignificant, it all adds up. That £3 you spend on your morning coffee at the café on your way to work adds up to £15 per week, or well over £700 per year, and with clothes it’s near impossible to keep up with whatever the latest trend is, after all, fast fashion is exactly that. So how can you avoid overspending? Well, budgeting is key. Something I do is split my money across two bank accounts, one that my income goes into and one that my debit card is attached to, which I use for spending. Every week a standing order transfers a certain amount of money to my spending account, which is my limit for the week. That way I can control my spending.
Another idea is to review your bank statement and figure out where you can cut costs. If you’re someone who buys lunch everyday at work, imagine how much you’d save by bringing a home-made lunch, or even leftovers from last night’s dinner. Of course that doesn’t mean that you can’t treat yourself once in a while!
2) Not putting enough money aside
One third of people in the UK only have £600 in their savings and 1 in 10 have absolutely no savings at all. Nothing. Although at times it’s easy to forget about the need to save, especially if you have no use for savings at the moment, it’s an incredible feeling to know that you’re covered should an emergency situation arise. A good idea is to find out where you can save money and work towards saving at least 20% of your income.
3) Not saving towards the future
Similarly, another common mistake is not saving toward long-term things, such as buying a house, saving for your children’s future or for your retirement. It’s really common to hear people say that they’re saving towards a holiday, towards moving out or even towards buying a new designer handbag. It’s great to save for those things in the short term that make life more enjoyable, but remember to put money aside for the future too.
4) Spending money on credit
Having an overdraft can be a really great buffer, for example if your rent payment is due on the 1st of each month but your paycheck only arrives on the 5th. A credit card can be great for the same reason and can also help to build your credit score. However the issue is that many people spend borrowed money without knowing how they’ll pay it back (trust me I’ve been there, I once went on an entire holiday using borrowed money). Often the high interest rates prevent people from making progress on the repayment, leading to more and more debt. A good thing to do is to make a savings plan as soon as you decide to buy something substantial. For example, if you’re thinking of going on a mini-break costing £600 in total, you could save £100 each month from your paycheck over the six months prior to needing the money. You could still use your credit card to pay for the holiday, in order to build credit, but you’d already have the money ready to pay it off before incurring any charges.
5) Not investing earlier
Finally, one of the most common mistakes is not investing earlier.
In the world of bank interest rates of 0.1%, investing is a great option to make your money grow. Although some say investing is equivalent to gambling, there are some “safer” ways to invest, such as putting your money into exchange traded funds (ETFs), which are essentially a collection of stocks. Instead of placing all your faith into Apple or PayPal for example, you could simply buy shares of an ETF which consists of a wide range of companies. This means that although the value of individual stocks may go up or down in the short term, the difference will balance each other out and usually there will be a nice annual growth rate.
An example of an ETF is the Vanguard S&P 500 (VOO), which represents 500 of the largest companies in the US and has had an average annual increase of over 10% over the past five years. Of course past performance doesn’t necessarily dictate future performance, unpredictable events can happen and investing certainly isn’t risk free. However, the gains made can be amazing, especially if left for a long period of time, so I’d really recommend doing more research into stocks and seeing how you can grow your money.
So there you have it- four financial mistakes which you may currently be making. Acknowledging these and incorporating budgeting, saving and investing into my everyday life has helped me to be better with my own finances and I hope they will help you on your financial journey too.
