Being in your 20s is perhaps the best, most exciting part of life. Graduating from college, having newfound freedom and money from a fresh job, and being independent, can be a heady feeling. This age also brings about a new set of responsibilities, challenges and opportunities. Money management does not have to be difficult or complicated. With financial planning to literacy about money, you in your 20s can build a rock-solid future for yourself, if you take all the right decisions.
Here are some key financial mistakes to avoid in your 20s, to help you build a better financial future for yourself!
Not Defining A Budget For Yourself
Budgets are key to figuring out expenses and the amount you earn. Without having a budget, it is easy to overextend yourself and incur expenses that you may not even need. Economizing your expenses such as forgoing purchase of a fancy car, is not necessarily a bad thing unless you can afford it. That, you will only know when you have a budget in place. Yes, earning a salary, and having income to spend, is a liberating feeling in itself, but having a budget can help in defining the kind of expenses that are important, versus ones that you don’t need.
Running After Perks In A Job
When looking for a job, some people are enticed by the kind of perks that companies have to offer. But having frequent office picnics, a fully equipped gym and having a great coffee station, do not pay the bills or pay for your retirement fund. As a first step into the professional world, it is key to know how much money you need to run your household and plan for your future. Therefore, financial goals and financial planning can help you define the minimum threshold you would need as income, after which any non-monetary perks would be over and above that.
Being Extravagant With Your Expenses
Linked to the concept of budgeting are expenses. Extravagant expenses can be a multifold problem if not controlled. Taking up debts, living beyond your means, and purchasing items of high value and maintenance can easily lead to difficulty and mismatching your future income to your current expenses. Spending on a luxury car, heavy on the pocket dinners, lavish gatherings, dinners and events, ultimately mean living beyond means. This in turn means maintaining a lifestyle that you may not have the capacity to maintain today or in the future. Pace yourself to grow as your income grows, or you would be scrambling to fund your lifestyle all the time.
Borrowing, Borrowing and More Borrowing
Even as little borrowing as asking your parents for funds can continue to add up. The more you borrow, the more you steal your future earnings to pay for expenses today. This ultimately adds up to supporting your lifestyle right now. A strong financial plan along with a budget would help you identify whether this borrowing would be justified in comparison to your income or not. For example, when a company borrows for long term, they generally expect their investment to start giving them returns in the form of revenues. For the shorter term, their borrowing is to cover a cash inflow that may take longer than when payments are due.
Charging Your Credit Card
The first thing you do when you join your first job is open a bank account. The minute you do that, banks stand in a line to pitch you their credit cards. Credit cards have great benefits when you have emergency or urgent need for payments like a medical bill or a repair expense. However, once you feel the power of having to not pay money for an expense today, credit card expenses can hit the roof very easily. Having to constantly support your lifestyle choices with credit cards means debts that you will have to pay off with your future salaries. It is a tiresome and difficult rut to get out of, especially when you get used to a lifestyle that is supported by living beyond your means.
Making Payments Late
Late payments on your debts and on your credit cards means significant extra payments. Credit card companies in Pakistan generally charge a late fee that can range anywhere from PKR 1,000 or 1,500/- or a percentage (8 to 10% of the outstanding amount), depending on whichever is higher. Along with that, interest rates are charged on the outstanding amount as well. These interest rates or annual percentage rates (APR) as they are called, can vary anywhere between 36% to 45% which means a late payment on your credit card bill can land you with paying more than you actually spent!
Not Making Financial Plans
Plan your future today! Financial planning is not a complicated science. But not planning means the impact can cascade to a larger part of your adult life. With lack of financial planning, it is difficult to predict the expenses you may have to make in the near future. It also becomes difficult to budget and plan the kind of income or investments that you could be making to secure your future.
Planning and managing finances during the 20s can give a great boost to your future self. This does not mean that you can accurately predict how your life would be secure after you make a financial plan and invest in the right modes and securities. But it will still give you a good cushion and safety net in terms of income and savings. It can also help in building sound money management habits if you start today!