It’s the period in life where you are completely permitted to let your hair down and just enjoy things. At the same time, your 20s can also be a period which can make or break your future years.
We’re not talking about excessive alcohol consumption, or anything else which might be associated with this time in life. Instead, today’s post is all about finances and some of the common mistakes that young people tend to make during this phase. Suffice to say, if you fall part of this group now is the time to take action. If you don’t, this advice might still be actionable to you, or at least your children and grandchildren.
Mistake #1 – You only think in the present
Put simply, this first mistake revolves around forgetting emergencies and payments that are needed in the future. Emergencies can constitute anything from a broken-down car or boiler, while these future costs can range far and wide. For example, as daunting as it can sound, planning for the cost of a funeral is one step that some people take, while others might try and build up a kitty for the cost of elderly care.
By having one eye on these potential costs, you can at least reshape your finances accordingly.
Mistake #2 – You don’t factor in compounding
One of the hardest truths a lot of young people learn is about compounding. Unfortunately, when we borrow money, it’s not calculated in the same “simple interest” model that most of us are used to.
Instead, it’s there to accumulate. Every day, you are receiving an interest charge. It means that you are paying interest on the interest that has accumulated, meaning that the longer you leave your debts to build up the worse the situation gets.
Mistake #3 – History can catch up with you
During your younger days, it can become almost second nature to build up debt. You make the minimum repayment one month, and for the next month you don’t pay anything altogether.
Before you know it, your credit rating is in absolute tatters.
Now, not to brush over this topic for the present, but this can have far more serious consequences later down the line. Sure, you might not need your credit rating now, but years later when you are applying for a mortgage this is something that can come back and haunt you.
Mistake #4 – You live like you are wealthy
Sure, some of you might be lucky and may indeed be wealthy in your 20s. On the most part, this is unlikely, and as a result you need to live within your means.
This means if you make £1,000 per month, you should make sure you do not spend the whole salary in one go. It might allow you to buy all of the products you require now, but in reality your money isn’t working for you. Instead, you are working for money, and by leaving a little leftover you can invest and have even more luxuries in future years.