In your 20s, setting solid financial goals can lay the groundwork for long-term financial success. A little time spent planning can help you avoid a lot of money woes both now and in the future. So, what are the 5 financial mistakes to avoid in your 20s? Read on.

How to Avoid Financial Mistakes in Your 20s

Mistake 1  - Not Having an Emergency Fund – How Much Money Should You Save by 30?

One of the biggest financial mistakes is not having savings to fall back on. Aim to have 3-6 months of living expenses saved to protect yourself from unexpected costs.

Having an emergency fund is key to financial planning and the minimum you should aim for in terms of savings. Think about having 3-6 months’ worth of living expenses to cover you if you change jobs, get made redundant, or have a hefty bill to pay.

Set a monthly savings goal and ask: How much money should I have saved by 30? Well, if you’re wondering, the average for the UK is around £3748.

If you’d like to see how you stack up and compare to other people, your age in terms of savings, check out our Average savings article based on Age. If you can create a savings pot now in your 20s, you’ll form the habit for life, which is great news as life has a way of throwing curve balls at you.

Mistake 2 – Making Minimum Payments Only – How to Pay Off Debt in Your 20s

Paying only the minimum on credit cards or loans increases the amount of interest you’ll pay. In your 20s, focus on paying more than the minimum to reduce debt faster and save on interest.

Credit cards have notoriously high interest rates when you flip over to their standard rate, and managing debt effectively is crucial. Your debt can build up quickly, especially if you use it for big purchases. If you are not good at keeping track of this and not good at managing credit card debt and switching your card to a new lower rate, then pay off the debt as soon as you can and ideally always more than the minimum payment. Student loans are another source of debt, and while they have much lower rates than standard credit card rates, you should look to pay them off as soon as you can to avoid long-term interest payments.

Mistake 3: Neglecting Investments – Start Investing in Your 20s to Grow Wealth

Starting to invest early is key to growing wealth. Learn how the power of compound interest can help your money grow exponentially when you invest in your 20s.

So, what is the best way to start investing in your 20s? That’s easy to answer – just start, but start now; the sooner, the better. If you haven’t heard of compound interest and how powerful it can be to make money over time, then check out our article on compound interest and the compound interest calculator. Simply put, the sooner you start investing and saving, the better; this is a huge advantage of being in your 20s compared to someone in their 30s or 40s. There are lots of low-risk options on how to save money in your 20s, whether it’s a high-interest saving account with your bank or investing in an ETF such as the FTSE100 ( the hundred biggest UK companies bunched together, so your risk is diversified). How much should you invest?– well, if you can invest 10% of your income a month, it’s a great start. But if you can only invest £10 a month, this is also a great start – just be sure to increase it over time, such as when you get a pay rise.

Mistake 4 – Not Using a Budget – Budgeting Tips for Your 20s

Budgeting is essential to keep track of your income and expenses. Set up a budget and stick to it to avoid debt and save more money each month.

Learning how to budget in your 20s is another key life skill. Get into the habit of budgeting your monthly/weekly income. There are lots of budgeting apps to help you do this. Or go old school and put physical money away – the envelope system. Don’t get to the end of the month and go into your overdraft – this is bad news and difficult to get out of because of the high interest your bank will charge. Think about an amount for supermarket shopping, going out, hobbies, bills, rent, etc. Budgeting in your 20s can be tough with so much stuff to tempt you, but remain laser-focused and reap the rewards.

Mistake 5 – Ignoring Debt – How to Build a Good Credit Score in Your 20s

Ignoring debt can damage your credit score. Instead, tackle it head-on by setting up a repayment plan and working with creditors to manage what you owe.

Learning how to pay off debt in your 20s can be a real game-changer and can set you up for life. If you do get into debt, then deal with it head-on. Call your bank or credit provider and agree on terms to pay it back, they are more understanding than you might think and don’t forget, if you are struggling to manage your debt, there are plenty of official Government resources that can help

www.gov.uk/options-for-dealing-with-your-debts 

or Citizens Advice - www.citizensadvice.org.uk

You may ask yourself – How Can I improve my credit score? There are several ways of doing this – You can start by taking manageable and affordable credit like a credit card or a small bank loan and then paying the credit owed on time each month and ideally paying the credit off in full and start the process again. Other more surprising ways to improve your credit score are not moving home too often – trying to stay in one place for more than 3 years, and lastly, make sure you are on the electoral register www.gov.uk/register-to-vote

Improving your credit score is critical in your 20s and beyond. So, what is a good credit score? Well, according to Experian, is between 881 and 960. One example of why a good credit score is important is when you come to get a mortgage – a person with a bad credit score will always be charged more interest by the lender than someone with a good credit score. Companies like Experian offer free credit score checks if you’re wondering.

What financial mistakes did you make in your 20s, or what advice would you give to someone just starting out? Share your thoughts in the comments below!