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5 Common Money Mistakes in Your 20s

The decade between 20 and 30 is a crucial year for your financial health. You’re navigating the “real world” for the first time in your life, and you’re trying to figure out how to do this whole adulting thing. Your finances during your 20s can make or break your financial future, so it’s important to educate yourself on the common mistakes people have made during this time in their lives. Check out the five common money mistakes people make in their 20s and how to avoid the same pitfalls.

1. Delaying Retirement Savings

Retirement seems like a distant dream, not something someone who is just starting out in life usually spends a lot of time considering. And that’s your first mistake: Not saving for retirement. When you’re in your early 20s, typical investment guidance suggests putting aside 3-5 per cent of your paycheque whereas starting in your 40s requires you to at least double that percentage.

Starting to save in your 20s is also a great habit to create. It makes it a lot easier to save for costly items later. Even if it’s only a few bucks out of each paycheck, that adds up quick. Consider this: if you put $100 a month into a Registered Retirement Savings Plan (RRSP) and you earn 5% on your money, it will have grown to around $181,000 in 40 years. What’s more, it’s tax deductible, meaning you will have the opportunity to claim contributions on your taxes and receive money back.

You should also look into contributing to the company pension plan if one is available at your job. Many companies will match up to three per cent – effectively doubling your contribution. Often times this looks like an employer-sponsored registered pension plan (RPP); those who hold RPP assets have been shown to have higher incomes, longer job tenure, and a higher median net worth.

2. Not Paying Towards Your Debt

In the rush to prove adulthood, many 20-somethings end up increasing their debt rather than paying off the debt they have. They need cars to get to their job and a home to come back to afterwards.

But the truth is, Canadians currently in their 20s are officially the most indebted generation ever, holding an average $28,000 in student loan debt. While focusing on paying that off doesn’t mean you shouldn’t invest in yourself, it does mean that you should take a hard look at the value of whatever it is you’re purchasing that can bring about more debt.

3. Living Beyond Your Means

Whether you’re still in university, just graduated or already in the work force, it’s a whole different world than when you lived with your parents and they paid for everything. You might say that you’re used to a certain lifestyle. Or maybe the Insta-glam world on social media is giving you a strong case of FOMO (fear of missing out). Either way, it’s easy to spend beyond your means when you’re not paying attention.

And if you’re one of those who spends their way into the standard of living you feel like you deserve, you’re not alone. According to Macleans, we’re feeling richer than we used to – but we’re not actually any richer. There’s a $65 billion gap between what we consumed and what we produced, proof we are all living beyond our means.

But this is one of those lessons in life, that just because everyone else is doing it doesn’t mean you should, too. Getting smart about what you can actually afford will save you more than just money in the future, but stress – and the resulting economic and health consequences from it. That means creating a budget and building the self-discipline it takes to follow it.

4. Overspending on Big Ticket Items

It’s easy to go crazy rewarding yourself with those milestone possessions that show everyone you’ve officially “made it” as an adult. The new income - 20-somethings net an average of $45,434 a year with a college diploma – often leads to spending sprees.

Cars, homes, even a wedding ring – and subsequent wedding day – can drive up monthly costs. Car insurance alone reaches as high as $7,000 a year in some Canadian cities. Houses aren’t much better, with the market driving up values of homes to an unprecedented level; single-family homes jumped almost half a per cent in just one month. To put that into perspective, that’s a $1,000 increase for a $200,000 home – in just one month!

It’s easy to get caught up in the frenzy of “starting your life” and “being an adult.” But you don’t have to rush into any major financial decisions. Instead, slow it down and look at all of your options, including roommates, car sharing and public transport to help keep your spending habits in check.

5. Not Building Your Net Worth

Do you know how to calculate your net worth? It’s pretty simple: Add up your assets (what you own), add up your liabilities (what you owe), and subtract your liabilities from your assets. If you’re like most 20-somethings, you’re probably close to zero. And while it may seem like the best thing to do is put your head down and focus only on paying off your debt to increase your net worth - there’s the other side of the coin you’re not considering: Increasing your net worth.

Let’s look at an example offered by Globe and Mail:

“Let's say a graduate has loans of $30,000 postgraduation and, after paying for their various expenses, they have an extra $400 a month to invest. If they put 100 percent of that toward paying off their student loan, it would take a little more than 8 1/2years to pay it off. If they instead invested that $400 in a tax-free savings account in conservative investments, earning 4% after fees, they would have $45,000 after eight years.”

Not only could you fully pay off the remaining amount of your student loans, but you will still have plenty of money in your savings account leftover - and this is just following a relatively conservative investment plan.

All of this is to say, sometimes when we’re just getting on our feet during our 20s, it can be really hard to just get through the day. Being aware of your spending, investing in yourself, thinking through purchases, and looking towards the future can all create a stable financial situation, both now and in the future. But, for now, during those times when you need a little help bridging the gap between paycheques, 310-LOAN is here to help!

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