Biggest Financial Mistakes In Your 20's
Trust me I get it your twenties are not what the movies said, there is a lot of transition during this period of our lives. Some of us have gone from moving out of college dorm rooms, graduation, moving to start a new job, moving jobs, getting married. So many big events for us to juggle, oh and not to mention you are now tasked with handling your own finances. I get it, it is a lot, but the reality is you are young, but let me give you some tips on how to navigate this world of finances. I will outline some common mistakes that people tend to make in their twenties.
Buying Life Insurances/annuities
This is sadly a common thing that I have seen amongst clients in general, and by the time people realize this was a bad decision it is usually too late to course correct. There are a few reasons why you should consider delaying the purchase of a life insurance policy in your 20’s
The purpose of a life insurance policy is to protect those who depend on your income so that if something catastrophic were to happen to you, the people who depend on your income would be taken care of. But if you are single with no kids there are probably not a lot of people depending on you financially.
Annuities and Life Insurance provide a sense of “security” that you do not need. I think it is helpful to understand there are always trade-offs. With that said, the perceived security of an annuity takes away from the growth potential of your hard-earned money.
Annuities are expensive! That is because annuities are made for people who are looking for an investment vehicle that will ensure them a regular payment, and the fees they end up paying end up taking away from the actual take-home pay.
Annuities are extremely hard to get out of, so this limits the ability to make investment decisions within the annuity, and more importantly, it is extremely hard to get the money out of the annuity without a lot of penalties.
Paying off student loans too aggressively
I get it, your parents told you to pay off your student loans before you do anything else, but I’m sure by this age you have been able to realize your parents are not always right. That is because of opportunity cost, this means that you are losing out on a potential gain from another source. Consider this, with the average interest rate of student loans being anywhere from 3-5%, if you were to invest your money into a broadly diversified fund using historical data, you could expect an 8-10% rate of return on your investment. So that is a potential 7% return you are theoretically missing out on.
Example: You paid $250 each month $250 x 12 = $3,000 a year towards your student loans that had a 4% Interest rate.
You paid $250 each month $250 x 12 = $3,000 a year towards an investable account that had an expected rate of return of 10%. After 10 years you would have around $47,000.
Not creating an emergency fund with a plan
Foundational to any financial plan is having an emergency fund, which might sound like a given, and it is. But the reality is you can get to a place where you have too much in cash, the benefit of having money in cash is the accessibility, The downside is, as you keep money in cash, you are theoretically losing money. As inflation grows, your dollar does not, so this is where the recommendation of having a cushion of 3-6 months of living expenses come into place. You have a set amount of money that is accessible to you if anything were to happen. The rest should be used for achieving other intermediate to long-term goals, and those things are usually met by giving your money exposure to growth by investing wisely and working with a knowledgeable financial planner.
I get it, we are young and things like marriage, children, retirement, home purchases, saving for our children’s education, etc. seem far away. In some ways, you are right, but I think around the age of 21 you start to realize that the decisions you made in your past can’t be erased, good or bad. So, make good decisions for your future self.
This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.