Your 20s are an incredible decade. Here’s the money traps to avoid in your 20s so that you can enter your 30s without a financial hangover.
Are you in your 20s?
Your 20s can be some of the best years of your life. It’s your time to work out what you’re doing in life, to kick some career goals and get to know yourself.
When you’re adulting for the first time, you’re bound to make mistakes.
What’s important is that those money mistakes don’t haunt you into your 30s. To help you out, we’ve identified money traps to be aware of now so that you can kick some bad money habits to the curb now and put future you in a better position.
Here are the 7 money traps to avoid in your 20s:
1. Getting into debt
It can be very easy to get more into debt over time. Whether it’s a car loan to afford your first car, a credit card that you whip out to get you out of a problem or a buy now pay later account that doesn’t quite get paid off.
The issue with debt is that it builds up over time. Interest gets added to what you owe and builds up each year thanks to compound interest. How does compound interest work?
Think of compound interest as a snowball at the top of a hill, which picks up more snow as it rolls down until it emerges as a much bigger snowball.
So in short, debt gets bigger over time if you don’t get rid of it. You owe more money and the debt gets bigger over time. And that’s why getting into debt is one of the biggest money traps to avoid in your 20s.
2. Not investing
Investing is a great way to build wealth over time. It works like the compound interest we mentioned when talking about debt but in reverse because that interest is working for you. What do we mean by that? Well, your interest builds up over time but it grows the money, you actually have rather than money you owe to someone else. It’s compound interest working for you rather than against you.
The best thing about investing is that the younger you start, the more interest you can potentially earn on your investments. So if you don’t start investing in your 20s, you are leaving money on the table. I’ve spoken about my own investing journey here if you’d like some inspiration to get started.
3. Buying brand new cars
I get it. You want new and shiny when you buy a product like a car that many people see as a status symbol. You’ve worked hard for it and you want that new car smell rather than the late night Maccas scent left by the previous owner.
The issue is that new cars drop in value quickly and when you’re young and at the start of your career, that’s not a drop in value that serves you. You lose around 15% of a new car’s value the moment you drive it out of the dealership and then lose another 15% in the first year that you own it. If you pay $30,000 for a new car, you’ve lost $6,000 in the first year you own it. And if you’re buying it with a car loan, you’ll pay back more than $30,000 initial price as you’re also paying interest.
By all means, buy a new car later in life. But given the huge drop in value, buying a new car is a money trap for a 20 something that you should stay well clear of.
4. Not thinking about retirement
When you’re in your 20s, you feel invincible. Why would you think about the end of your life when you’re really just starting it?
The reason is that time is on your side. Most retirement funds, particularly in Australia operate like investments in that they add up over time. Your initial money builds up and compounds. See the snowball example as the best visual example of compound interest.
If you start saving for retirement in your 20s, you will reap the benefits of that compounding later. It’s all about how you want to spend your time in the retirement village and whether you’ll be wearing cashmere or acrylic. Not thinking about your retired self in your 20s means that you are putting the onus on future you to make your retirement a good one and making them save a lot more that you would have to in your 20s.
5. Throwing away your savings on a wedding
Many people still get married in their 20s or start saving for it as a priority. It can seem like you have to spend big on your wedding because it’s your big day and you only get married once.
You’ve got to spend money for your dream designer white dress, the wedding venue and the sit down lunch, catering for hundreds of guests. Add in spending for the clothing of the bridesmaids, hiring a DJ or band to entertain your guests and of course, the honeymoon holiday of a lifetime and you’ll either be saving for a few years or going into debt to pay for it all.
The money trap is one of opportunity cost. Because that money you’re spending on one day could be spent instead on starting to invest, saving for retirements or ensuring you emerge from your 20s debt free. Societal or family pressure adds up and means that many of us feel like we have to buy into the money trap of throwing away your savings, or worse, going into debt in order to get married.
6. Feeling like you don’t need an emergency fund
When you’re in your 20s, it feels like you’re going to live forever. So many 20 somethings I know don’t have savings. Those that do are saving for a specific goal like a new car or a home deposit. Very few 20 somethings have an emergency fund.
An emergency fund is a fund set up that is liquid and set aside for emergencies. You don’t dip into it unless it’s an actual emergency like needing to visit your family at the last minute or fix a broken washing machine, with more details about why you need an emergency fund available here. An emergency fund can protect you from having to take on debt and give you peace of mind while facing stressful situations.
Life means unpredictability and you protect yourself against the worst by having an emergency fund so that you have money to draw on to deal with whatever life throws at you. If you feel guilty reading this and are motivated to start an emergency fund, we’ve outlined a strategy of how to build your emergency fund.
7. Spending more than you earn
Without a doubt, my number one money trap is spending more money than you earn. The secret of wealth building is simple: live within your means consistency. You will likely earn more money after your 20s as you build up your reputation and skills. However, if you have bad financial habits including spending more than you earn, you will find it hard to build wealth no matter what you earn.
Your 20s can be difficult when it comes to saving money. I remember living in a major city on a salary and really struggling to save money. However, spending beyond your means isn’t sustainable as a habit because bills pile up. Use your 20s as an opportunity to start spending less and it will pay off compared to the money trap of spending more than you earn.
Financial freedom feels better than anything you can buy.
It’s way too easy to put off money moves until later. We’re talking about these money traps so that you know them and can avoid falling into them and entering your 30s with a financial hangover. We’ll do a flip side of things you should do in your 20s so that you can take action to move towards positive.
Read more: 5 steps to financial fitness