Are You Making These Costly Mistakes?

As a Certified Financial Planner™, I know that making smart financial decisions in your 20s can set the foundation for a secure financial future. Unfortunately, many young adults make common mistakes that can have long-lasting consequences.

In this post, I will share the top 5 financial mistakes to avoid in your 20s. As well as 2 Purchases to avoid.

1. Not Having An Emergency Fund🌧️☂️

One of the biggest financial mistakes is not having an emergency fund. An emergency fund is a savings account set aside for unexpected expenses.

Having an emergency fund is crucial to financial stability and peace of mind. The

recommended amount by Certified Financial Planners (CFPs) is 3-6 months' worth of living expenses, with a preference for 6 months for those with single income and at least 3 months for those with dual income.

Having an emergency fund is the foundation of your financial plan, as it provides a safety net for unexpected expenses, such as a medical emergency, job loss, or car repair. Without an emergency fund, these unexpected events can quickly turn into financial disasters. It's important to prioritize building and maintaining an emergency fund to protect yourself against financial shocks.

2. 💳 Carrying High Credit Card Balances 💳

Another common financial mistake is carrying high credit card balances. Not only does this accrue high-interest debt, but it also hurts your credit score. Instead of carrying a balance, aim to pay off your credit card in full every month. This will not only save you money on interest but also help you establish a positive credit history.

0% Credit Introductory Rate Credit Cards

If you must use a credit card. Consider a 0% interest rate and paying it off before the 0% rate expires.

Credit cards with 0% introductory interest rates can be a great tool for bridging the gap on large expenses, especially when you're working to build an emergency fund. When used correctly, a 0% credit card can help you avoid accruing high-interest debt and allow you to save for an emergency fund simultaneously.

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Example:

Joe has an unexpected car expense of $1,500, and has no Emergency fund. Joe opens a 0% credit card for 15 months, puts the expense of $1,500 on his card, and pays $100 per month toward the card.

By making the $100 monthly payments and sticking to his budget, Joe is able to completely pay off the expense in 15 months and pay no interest. Additionally, because he's not accruing interest on his credit card, he's able to save $2,000 for his emergency fund, which he's never been able to do before.

It's important to note that this strategy is dependent on your credit score and your ability to follow the plan as prescribed. If you don't have a good credit score, you may not be eligible for a 0% credit card. And, if you're not committed to paying off the credit card balance before the end of the introductory rate, you'll begin to accrue high-interest debt, and the plan will fail.

Additionally, if you can't control your spending habits, this plan will not work. You must be committed to no excess spending on your credit card as you work to build your emergency fund. This means avoiding unnecessary purchases and sticking to your budget.

Using a 0% credit card can be a valuable tool for bridging the gap on large expenses while building an emergency fund. However, it requires discipline, commitment, and a solid understanding of your financial situation and habits.

3. Not Contributing Enough To Retirement Accounts 🏖️ 🌴

401(k) Match

One of the biggest financial regrets people have is not saving enough for retirement. The earlier you start saving, the more time your money has to grow through compound interest. Taking advantage of your employer's 401(k) match is a great way to boost your retirement savings and receive free money from your employer.

Roth IRA (after tax Investments)

After taking advantage of your employer's full match, it may be beneficial to contribute to a Roth IRA. The Tax Cuts and Jobs Act (TCJA) of 2017 is set to expire in 2026, and there is a likelihood of seeing a significant increase in personal tax rates. This creates an opportunity to save and invest after-taxes to avoid paying higher taxes on your retirement accounts in the future. By contributing to a Roth IRA, your money grows tax-free, and you won't have to pay taxes on your withdrawals in retirement.

Health Savings Account The "Holy Trinity" Of Tax Vehicles

In addition to a Roth IRA, the Health Savings Account (HSA) is a valuable investment vehicle, commonly referred to as the "Holy-Trinity" of tax vehicles. An HSA is tax-deductible, tax-deferred, and tax-free if used for medical expenses. You can also withdraw your past medical expenses for every year that the HSA has been open, making it a versatile tool for saving and investing.

The HSA account is the only investment to not be taxed going in, going out (if for health), and grows tax-deferred.

Diversification Of Your Investment Vehicles

Starting early on your investments provides not only more time for growth but also more time for proper diversification of your investment vehicles. With many options available, it's essential to talk to a financial advisor to determine the best investment vehicles for your financial goals. Diversifying your investments as well as type of investment accounts you own is crucial to mitigating risk and maximizing returns over time.

Speaking of diversification, let's talk about the next biggest mistake: Not Diversifying your investments!

4. Not Diversifying Your Investments

Investment Portfolio

Diversification is key to a well-rounded investment portfolio. It helps spread risk and reduces the impact of any one investment's loss. Diversifying your investments across stocks, bonds, and other assets can help you reach your long-term financial goals while reducing your overall investment risk.

Investing in a diverse range of assets is crucial for building a well-rounded investment portfolio. It helps spread out risk and reduces the impact of any one investment's loss. As a financial advisor, I always advise my clients to diversify their investments across stocks, bonds, and other assets, with a mix that aligns with their risk tolerance and financial goals.

🏠Real Estate🏠

In addition to traditional investments, it's also important to consider real estate as a component of your investment portfolio. For first-time homebuyers, there are many advantages and government incentives to take advantage of.

When buying a home, it's important to have a long-term perspective, with a goal of holding onto the property for at least 5-7 years or more. Owning a home not only provides a place to live, but it is also a unique investment that can appreciate over time.dditionally, having a proper emergency fund is essential when owning a home as unexpected repairs or maintenance can arise. It's important to be prepared for these costs so that they don't derail your overall financial goals.

Your Own Business

Diversifying your investments also means investing in yourself. Consider starting a side hustle or your own business, which may require some initial capital. However, the potential returns

from investing in yourself can be much higher than a traditional investment, and you have much more control over the success or failure of the venture. Keep in mind that with this control comes the responsibility of making wise business decisions and avoiding pitfalls that could harm the business.

Finally, I want to emphasize the importance of consulting a financial advisor to help create a diversified investment portfolio. With so many options available, it can be challenging to determine the right mix of investments for your unique situation. By working with a professional, you can ensure that your investments are aligned with your financial goals and diversified in a way that minimizes risk.

5. Not Regularly Reviewing And Updating Your Financial Plan

Having a long-term financial plan is essential for securing your financial future. But, it's not just about creating a plan and forgetting about it. Regular reviews and updates are crucial to ensure that your financial plan stays aligned with your changing financial goals and circumstances. This can involve updating your investment portfolio, revisiting your emergency fund, and adjusting your retirement savings strategy as needed. Working with a financial advisor who understands your unique financial situation can be extremely helpful in ensuring that your financial plan stays on track.

For my clients, I recommend reviewing their financial holdings and plan every quarter to ensure everything is still on track. It's also important to review the plan whenever there is a significant life change or any macro socio-economic event that may require adjustment.

Personally, I specialize in the taxation of investments as it relates to retirement planning.

My clientele typically consists of self-employed business owners, contract workers, or entrepreneurs in their mid-30s to mid-40s who face highly variable income. To address their financial needs, I design dynamic financial plans tailored to their unique circumstances.

If you're looking for an advisor to help you plan your financial future, it's important to interview a few different advisors to find the right fit for you. I would be happy to schedule an interview with you to determine if I'm the right fit for your family's financial future.

2 Important Financial Purchases to Avoid:

1. Lavish Spending on Weddings

Weddings are a joyous occasion, but they can also be a major source of financial stress, especially for young couples. One common mistake that people make in their 20s is to spend lavishly on their weddings. The average cost of a wedding in the United States is around $33,000, which can be a huge financial burden for a young couple just starting out. Some people feel pressure to have the perfect wedding and spend more than they can afford on things like venues, catering, and decorations. This lavish spending often leads to starting married life in debt and can put a strain on the couple's finances for years to come.

2. Buying Depreciating Assets

Another financial mistake that people in their 20s often make is buying depreciating assets such as new cars, boats, and toys. These items lose value quickly and are often considered liabilities instead of assets. For example, a new car can lose up to 40% of its value within the first three years of ownership. Additionally, owning these items comes with additional costs such as maintenance, insurance, and storage. It is much better to focus on building wealth by saving and investing, rather than acquiring depreciating assets that drain your finances.

Avoiding these financial mistakes can help you reach your financial goals and secure your financial future. Remember, everyone's financial situation is unique, and it's important to work with a trusted financial advisor to create a personalized financial plan that meets your specific needs.

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Cetera Investors is a marketing name of Cetera Investment Services. Securities and insurance offered through Cetera Investment Services LLC, member FINRA/SIPC. Advisory services offered through Cetera Investment Advisers LLC. 10194 Crosspoint Blvd. Suite 100, Indianapolis, IN 46256. Neither Cetera Investment Services LLC nor any of its affiliates offer tax or legal service.

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