Like many people, you may have blown through your 20s making financial decisions that served you well in the moment, but may not have been particularly responsible. Dinner out several times a week, credit card bills you barely looked at and luxury cars way beyond your budget—life was practically a party!
But now, the party’s over. You’ve woken up in your 30s and realized that all that overspending is going to cost you big—and it’s going to cost for years to come.
Luckily, there’s hope. It’s not too late to fix the financial mistakes we all make when we’re young and blissfully ignorant.
Here are six of the most common mistakes people make in their 20s and how to fix them:
1.) The mistake: Racking up credit card debt
Maybe you were broke while in college, but desperate for a good time, so you swiped your way through vacations and nights out on the town. Or maybe you knew you were falling into the debt trap to cover student-related needs on a shoestring budget. Unfortunately, it didn’t just go away like you’d hoped.
The fix: Stop using your credit cards It’s time to be an adult and own up to your mistakes. Learn how to say no to impulsive purchases and to live within your means. Create a budget to help monitor and track your discretionary spending instead of mindlessly plowing through your paycheck each month. Stop swiping your credit cards and stick to debit or cash only. Don’t let those credit card bills get any higher!
2.) The mistake: Ignoring your credit score Aside from being the gateway to endless spending, aggressive credit card balances have probably handicapped your credit score, making it difficult or impossible to obtain a personal loan. A poor score will also burden you with an unfavorable interest rate for the loans you do qualify for. And that means you’ll be paying off the mistakes of your 20s for years to come.
The fix: Know your score and pay down your credit card debt It’s never too late to fix a credit score. Begin by monitoring your score. You can order a complimentary credit report once a year from each of the three major credit agencies at annualcreditreport.com. If you are enrolled in Online Banking at Advantage One, we offer free credit monitoring through our partner, SavvyMoney. You can also check out your score on sites like CreditKarma.com and Bankrate.com. This will give you an idea of what you’re working with as you work on climbing out of financial hardship.
Next, work on paying off credit card debt instead of only making the minimum payments each month. Look through your credit card bills and crunch some numbers until you know exactly how high your credit card debt really is. Then, choose one bill to pay down first and begin making the maximum payment your budget will allow. Once you’ve paid it off, divert all those funds onto the next bill until it’s gone and repeat until you have no more debt. Paying down your debt and minimizing the utilization rate on your credit cards will greatly improve your score.
3.) The mistake: Skipping student loan bills When you’re facing a debt in the tens of thousands of dollars while earning an entry-level salary, it’s tempting to just pretend it doesn’t exist. Unfortunately, though, that’s the worst thing you can do for your loan and your credit.
The fix: Work it into your budget
Call your lender to work out a more feasible payment plan. You can also check if you qualify for a student loan forgiveness program. Most importantly, make your student loan payments a part of your debt payment plan so you never miss a payment.
4.) The mistake: Neglecting your retirement Planning for your decades-away retirement may be one of the last things on your list. However, starting to fund your retirement later in the game means missing out on years of compound interest gains.
The fix: Think of it as a fixed expense Don’t think of retirement savings as an extra; think of it as a necessary, fixed expense that belongs in your budget like your rent and phone bill. Work with the most you can afford and max out your contributions to an IRA or your company’s 401(k) plan.
5.) The mistake: Not having an emergency fund Life’s great—who needs to think about emergencies? Unfortunately, you do. Scrambling for funds to pay for a large medical expense or to live off of during an unexpected layoff can be a nightmare. Turning toward credit cards to help you get through a rough time can also be the beginning of a debt cycle whose effects are felt for years to come.
The fix: Start small Experts recommend socking away 3-6 months’ worth of living expenses, but if that’s just not possible for you, start small. Work with whatever you can to make monthly contributions to an emergency fund. Set up an automatic monthly transfer so you never forget. It’s best to keep your emergency money in an account that offers an attractive earnings rate but allows you to withdraw funds without paying a penalty. An Advantage One Savings Accounts could be a good choice. Call, click or stop by to speak to us about setting yours up today.
6.) The mistake: Not creating financial goals It’s understandable not to have your entire life planned out yet, but it’s important to set some financial goals.
The fix: Create goals now Take some time to set some financial goals. Do you want to buy a house within the next decade? Do you dream of opening a business? Are you hoping to retire at 55? Having a concrete goal in mind will help you stick to your budget and manage your money responsibly.
Messed up while in your 20s? It’s not too late to get your finances on track! Follow our tips for a financially sound future.
How did you fix the financial mistakes of your 20s? Let us know in the comments!
Using a personal loan to refinance your existing debt can make your debt more manageable. You’ll have one monthly payment at one interest rate instead of many smaller bills due on different days of the month.
Will personal loans work for you?
1.) Have I fixed the debt problem?
Think about why you’re in debt. If a medical bill, job loss or some other temporary hardship describes your situation, the fact that you have a job or have paid the medical bill means you’ve solved the problem that caused the debt in the first place.
If, on the other hand, you accumulated debt by overspending on credit cards, a debt consolidation loan may not be the answer just yet. First make a budget you can stick to, learn how to save and gain responsibility in your use of credit. Getting a debt consolidation loan without doing those things first is a temporary solution that can make matters worse.
2.) Can I commit to a repayment plan?
If you’re struggling to make minimum monthly payments on bills, a debt consolidation loan can only do so much. It’s possible that the lower interest rate will make repayment easier, but bundling all of that debt together could result in a higher monthly payment over a shorter period of time. Before you speak to a loan officer, figure out how much you can afford to put toward getting out of debt. Your loan officer can work backward from there to figure out terms, interest rate and total amount borrowed.
If you’re relying on a fluctuating stream of income to repay debt, it may be difficult to commit to a strict repayment plan that’s as aggressive as you like. You can still make extra principal payments on a personal loan, so your strategy of making intermittent payments will still help. You just can’t figure them into your monthly payment calculation.
3.) Is my interest rate the problem?
For some people, the biggest chunk of their debt is a student loan. These loans receive fairly generous terms, since a college degree should generally result in a higher-paying job. Debt consolidation for student loans, especially subsidized PLUS loans, may not make a great deal of sense. You’re better off negotiating the repayment structure with your lender if the monthly payments are unrealistic.
On the other hand, if you’re dealing with credit card debt, interest rate is definitely part of the problem. Credit card debt interest regularly runs in the 20% range, more than twice the average rate of personal loans. Refinancing this debt with a personal loan can save you plenty over making minimum credit card payments.
4.) Will a personal loan cover all my debts?
The average American household has nearly $15,000 in credit card debt.
If you have more than $50,000 in credit card debt, it’s going to be difficult to put together a personal loan that can finance the entire amount. It’s worth prioritizing the highest interest cards and consolidating those instead of trying to divide your refinancing evenly between accounts. Get the biggest problems out of the way, so you can focus your efforts on picking up the pieces.
Debt consolidation doesn’t work for everyone, but it can do wonders for many people. The ability to eliminate high-interest debt and simplify monthly expenses into one payment for debt servicing can change a family’s whole financial picture. Gather your account statements and your paycheck stubs, and head to [CREDIT UNION] today!
What’s your secret weapon in the battle against debt? Any tips and tricks that helped you get a handle on what you owe? Let us know!
Philosophies for paying off your debt
Is there a right or wrong way to pay down your loans? The answer is not cut and dried; it depends on your financial and personal goals and objectives.
Here are two main theories about the order in which you should pay off loans, along with further advice about each of those plans.
Theory No. 1: Highest interest rate first
The first school of thought is to pay off debts by interest rate from highest to lowest. The theory behind this is that it will save you the most money in the long run. This plan makes sense because debt with high interest is costing you much more money over time. The problem with this strategy is this: You may have more control over your finances, but you won’t feel as though you do.
Be aware — if your highest-interest loan is also your largest debt, it will take a while to pay it off. It may not look or feel as though you are making any progress for quite some time. This lack of satisfaction — not feeling that the debt is well on track to be paid in full — could make it more difficult to stay focused on your goal of paying off debt. That leads to the second intellectual outlook.
Theory No. 2: Smaller debts first
If you are into immediate gratification, this is the plan for you.
“You can clear up a lot of smaller monthly payments and quickly apply those to the extra money you are paying off on your debt snowball,” explains money management expert Miriam Caldwell, author of the online blog “Money in Your 20s.”
The downside here is that you could miss out on some important tax benefits of having big loans paid down, and you could end up paying a lot more interest in the end (see reasoning behind Theory No.1) by putting high-interest loans last in order of importance.
So what’s an embattled debt-payer to do?
Balance your approach
You may choose to intertwine the two methods. Start by knocking out a few of your small loans in the first couple of months, and then work on larger-interest debt before going back to paying on small loans again. Another way to balance out your methodology is to pay smaller loans off more quickly if their interest rates are generally within a percentage point or two, because that will give you more power (i.e., money) to pay off the larger loans.
“You may want to put the loans that save you on your taxes at the end of your debt payment plan. This would be your student loan, home equity loan or second mortgage,” suggests Caldwell. “These debts may also have lower interest rates. This lets you continue to deduct the interest from your taxes each year.”
She adds that you should never hold on to debt simply for tax purposes.
Stick to the plan
Eventually, the minimum payments may start to go down on debts such as credit cards. As tempting as it may be to use that extra money — those funds that you once had to put toward loan payments — on frivolous personal items, you must resist the urge. Use that extra money as an additional payment on your loans, using the same plan you started with initially to designate priority. This will help cut down your debt even more.
It may be hard to stay motivated, but you can do it! Create a chart so you can visually track your progress, or reward yourself at certain milestones with a small dinner out or a movie date. No matter what, remember that as long as you keep moving forward with a solid plan, progress is being made.
Used with Permission. Published by IMN Bank Adviser Includes copyrighted material of IMakeNews, Inc. and its suppliers.
Ask a group of financial advisers to name one thing people should do to improve their financial outlook, and “save” is guaranteed to be the top response. But given a choice between savings and debt reduction, which is more important?
If you want a mathematical answer, there’s a lot of number crunching involved. Given today’s economic climate, the interest on your debt — even the relatively low interest charged federally subsidized student loans — might be higher than what you can earn through secure savings vehicles like savings accounts, CDs and money market funds. Given this situation, paying off your student loans early could be to your advantage.
“Once you have a modest balance in your emergency fund (say around $1,000 or so), begin working on your debt reduction plans,” suggests one popular online banking service. “That way, if an emergency does come up, you can address it without adding to your debt. Once you’ve eliminated your high interest debt, you can concentrate on saving up even more in your emergency fund. It’s conventional wisdom to have at least six months of living expenses saved up in an easily accessed account.”
Of course, if the situation changes and it becomes easy to get returns on savings and investments that are at rates higher than your student loan debt, then the effects of compound interest make maxing out your savings contributions each month a better long-term choice than maxing out your loan payments.
“From a financial standpoint, if the interest rate on your debt is lower than the interest rate on your savings or investment, then you’d get a higher return by saving versus paying off debt,” says credit and debt management expert LaToya Irby. “There are also tax benefits to retirement savings. The money you contribute to a 401(k) can often [be] excluded from your taxable income, resulting in a lighter tax burden. Take advantage of your employer’s offer to match contributions to your 401(k) plan. Don’t turn down free money.”
In other words, it’s better to save when saving gets you more money than you’ll spend on the student loan. Your own specific financial situation — the interest rate you have to pay on your student loan debt, the interest rate you can earn in safe and secure investments and the impact of your savings decisions on your tax burden are all important considerations.
In all likelihood, you will be better off in today’s economy paying down your student loan debt first. There are also psychological aspects of this question to consider, however, and the general recommendation given by financial and personal wealth experts is to save something — typically a set percentage of your income — every month. This will build a strong savings habit that you can make even stronger when you clear out that student loan debt.
“Allocate 50% of all you are able to save to your emergency fund, and 50% to debt reduction until you have four to six months’ of living expenses in your emergency fund,” recommends Ted Hunter, author of Money Smart. Once you’ve built up this emergency fund, “eliminate all debt except that which involves your home and your car, then maximize the tax-deferred savings allowed to you.”
Whether you follow Hunter’s strategy or not, you’ll need to examine your specific debt obligations and savings/investment opportunities before making a decision. With low returns on today’s savings vehicles, aggressively paying down your student loan debt while still contributing regularly to savings is likely to be the best choice.
Used with Permission. Published by IMN Bank Adviser Includes copyrighted material of IMakeNews, Inc. and its suppliers.