This is the first in a three-part series looking at the financial habits that shape our lives at different ages. While many of our clients are beyond their twenties, chances are you have children, grandchildren or other young family members who are just starting out. If so, this article is well worth passing on.
Why your twenties matter financially
The decisions we make in our twenties often have consequences that last for decades. Yet few people receive much financial education before entering adult life. Learning how to budget, save and invest is often a case of trial and error, and unfortunately some mistakes can prove expensive.
The good news is that developing good financial habits early can make a significant difference over the long term. Here are some of the most common money mistakes people make in their twenties, and how they can be avoided.
Thinking retirement is too far away
Retirement can feel so distant that it’s easy to believe it isn’t worth thinking about. In reality, your twenties are one of the best times to start saving.
Time is one of the greatest advantages an investor has. Thanks to the power of compound growth, even relatively small pension contributions made early in life have decades to potentially grow.
Someone who starts saving at 25 could accumulate substantially more than someone who waits until 35, even if the later saver contributes more each month.
Starting early isn’t about putting away huge sums. It’s about allowing time to do much of the hard work.
Underestimating the cost of independence
Moving into your own home is an exciting milestone, but it also brings a whole range of new financial responsibilities.
Rent or mortgage payments, utility bills, insurance, transport, food, subscriptions and socialising all compete for the same monthly income. Many young adults find that these costs add up much faster than expected.
Creating a realistic budget from the outset helps avoid overspending and provides a clearer picture of what can genuinely be afforded.
Relying on debt
Credit cards, overdrafts and buy-now-pay-later schemes can seem like a convenient way to spread costs, but they can quickly become expensive habits.
The biggest danger is becoming comfortable with spending tomorrow’s income today. Interest charges can significantly increase the true cost of purchases, making it much harder to build savings in the future.
Beware of lifestyle creep
Lifestyle creep can also catch people out. As earnings increase, spending often rises just as quickly through bigger holidays, new cars, upgraded phones and additional subscriptions. Without careful planning, pay rises disappear before they ever improve financial security.
Not building an emergency fund
Life rarely goes exactly to plan. Unexpected bills, redundancy, illness or emergency repairs can all place pressure on finances.
Having three to six months’ essential expenditure set aside in an easily accessible savings account can provide valuable peace of mind and prevent temporary setbacks becoming long-term debt problems.
Building an emergency fund is often one of the first and most important financial goals for young adults.
Ignoring workplace benefits
Many people simply accept their payslip without taking time to understand everything their employer offers.
Pension contributions, salary sacrifice arrangements, employee share schemes and other workplace benefits can provide significant long-term value. Failing to take advantage of them can mean missing out on what is effectively free money.
Understanding how tax, pensions and workplace benefits work from an early age can have a lasting impact on long-term financial wellbeing.
Keeping all savings in cash
Cash savings play an important role, particularly for emergencies and short-term goals.
However, keeping all long-term savings in cash means inflation gradually erodes their purchasing power over time. While investing involves risk and values can fall as well as rise, it also provides the opportunity for greater long-term growth than cash alone is likely to achieve.
Finding the right balance between cash reserves and long-term investing is an important part of building wealth.
Not setting financial goals
Saving without a purpose could make it difficult to stay motivated.
Whether the objective is buying a first home, travelling, starting a business or building financial independence, having clear goals helps people make better day-to-day financial decisions and measure their progress.
Thinking financial advice is only for older people
Many people assume financial advice is only relevant when approaching retirement or after accumulating significant wealth.
In reality, getting guidance early can help establish good habits, avoid costly mistakes and build a stronger financial foundation from the very beginning.
Building good financial habits for the future
If you know someone in their twenties who is beginning their financial journey, why not share this article with them? The lessons they learn today could make a lasting difference to their financial future.
In the next article in this series, we will look at the financial opportunities and challenges that often arise during your 30s and 40s.
This article is intended for general guidance only and is based on the opinion of Continuum it does not constitute financial advice. Individual circumstances vary, and you should consider seeking advice from a regulated financial adviser before making any decisions about your Savings, Investments, or retirement planning.
The value of an investment can go down as well as up. When investing Capital is at risk.
A pension is a long-term investment; the fund value can go down as well as up and this can impact the level of pension benefits available. Pension Income could also be affected by interest rates at the time benefits are taken. Pension savings are at risk of being eroded by inflation.
The Financial Conduct Authority does not regulate taxation advice or deposit accounts.
Equity investments do not afford the same capital security as deposit accounts.
Your home may be repossessed if you do not keep up repayments on your mortgage.
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