If you’re going to make a mistake, it’s better to make it early. This is an often-repeated phrase in startups and companies when launching new products. With your finances, it’s always better not to make mistakes, but if you’re going to (and you will), there are money mistakes that are better made in your 20s than in your 30s or early 40s.
There are personal finance lessons that aren’t taught in school. Even if they were, the gap between theory and practice is so large when it comes to money that it would be complicated to put them into practice.
Making money mistakes in your 20s is normal and can be positive as long as you learn from them. Here are the most common ones:
Spending too much on your car
The car is a status symbol in your 40s and also in your 20s. Having a car can make all the difference when it comes to making plans at that age, as well as affecting your pocket.
One of the most common mistakes is to spend too much on a car by buying a very expensive one, by tuning it or filling it with extras, or by getting long-term financing for it.
All three are mistakes from which you can learn. The first two should teach you to be clear about your priorities in life and focus your money on them. The car may actually be a priority if you really like it, or maybe not if all you need is a means of transport.
From the third mistake you can learn the dangers of debt. In other words, why you shouldn’t buy things you don’t really need with money you don’t have. Financing your car in the long term can turn a 12,000 euro vehicle into a total expense of 16,000 euros or more.
Thinking that saving is for later
“I’ll save when I earn more money.” This phrase is not exclusive to youth, but it does tend to be more frequent. In your 20s, plans and leisure options abound, meaning that saving requires an extra effort, especially in the long term.
However, there is no better time to get into the habit of saving than when you are young. This is because, once you do, you will never stop. The most effective formula for achieving this is to save automatically, as we explain in this article.
A good strategy for maintaining your savings impetus over the years is to save at least 25% of your salary increases. That way you avoid falling into an upward spending spiral and ensure that your savings increase as your income does.
Focusing on saving and forgetting about investment
Everyone more or less agrees about the need to save, especially in the short term. The same is not true for investment, especially when you are young. At the end of the day, retirement is a long way off, as are other goals, like stopping work at 40.
However, that investment is what will make the difference in the long run. If, aged 20, you started saving and investing 50 euros a month at an annual return of 5%, at the end of 20 years you would have 20,687 euros, of which more than 8,000 euros would be just interest.