Your 20s are a critical decade when it comes to managing your money.
Time is on your side when you're young, and a head start in saving and investing can result in massive financial gains down the road.
To get on track financially, start by avoiding these 13 common mistakes.
1. Living above your means.
Earning your first paycheck is liberating and thrilling. But as you begin to get raises, spending can tend to creep up as well, until we succumb to lifestyle inflation: living up to the ceiling of what our income will allow and thus failing to save for the future.
How to improve: Set up automatic savings to contribute a percentage of your paycheck to your 401(k) or investments before you even see it. When you get a raise, up your contributions by the same amount and you'll never have to adjust your budget, suggests the Money Wizard, a 27-year-old blogger and financial analyst with more than $170,000 in the bank.
2. Spending on the wrong things.
If you're overspending, there's a chance your money is going to the wrong places.
It is crucial to establish the difference between "wants" and "needs," Brad Sherman, president of Sherman Wealth Management, told Business Insider. Once you've accounted for all of your "needs" — such as housing, food, insurance, and student loan payments — and have set aside savings, then you can decide which "wants" to pursue. "If they don't fit into the budget, you're going to get into trouble later on," Sherman warns.
How to improve: If you're trying to break the habit of overspending — or keep it from developing — try tracking your money or signing up for an app that will do it for you, like Mint. You'll be able recognize patterns in your spending and may decide to put that $20 a week you spend on lattes toward your next vacation instead.
3. Being unaware of your cash flow.
Cash flow is one of the most important things to be aware of, especially in your 20s, says Jonathan Meaney, a certified financial planner and wealth manager at Carter Financial: "You've got to know where your money is going and you've got to make sure that more money is not going out than is coming in."
This means sitting down to craft a budget, but it doesn't have to be exhaustive. "A budget is simply a plan to make sure your money goes where you need it, instead of trickling away when you aren't paying attention," Sherman says. "And if you don't have one, that's likely what will happen."
How to improve: Start with three budgeting strategies super rich people use— you'd be surprised at how simple they are to implement. Or check out one of the many free budgeting apps, like Pennies, to help you categorize and monitor your monthly and annual spending.
4. Assuming you don't make enough money to start saving for retirement.
Retirement may seem far off when you haven't even hit 30 yet, but some experts say that if young people don't
change their bad savings habits and start investing, they'll miss the retirement boat completely.
"The amount you decide on — whether it be 3%, 5%, or 10% of your salary — needs to be a line item in your budget, just like beers or Starbucks are," Sherman says. "Anything greater than zero is better than zero." Don't get discouraged if you can only contribute a small percentage early on. Usually even a smaller amount saved early and consistently will grow into more money by retirement than a large amount saved later in life.
How to improve: Always contribute to your 401(k), if your company offers one, and get in the habit of upping your contribution on a consistent basis — just 0.5% of an increase can make a difference — either once a year or every time you get a raise. Check online to see if you can set up "auto-increase," which will automatically increase your contributions every year.
If you have extra money left over, consider investing in an IRA or Roth IRA. Contributions to a Roth IRA are taxed when they're made, so you can withdraw the contributions and earnings tax-free once you reach age 59 1/2. There is an income cap on these accounts ($116,000 a year or less for individuals in 2015; $183,000 or less for married couples filing jointly), so they're particularly well-suited to younger people.
5. Not taking advantage of your company 401(k) match.
Many companies that offer a 401(k) also offer a match program, meaning it will match whatever contribution you put towards your 401(k), up to a certain percentage.
The Money Wizard says he saves more than $5,000 each year in taxes by maxing out his 401(k) contributions — up to $18,000 a year — and taking advantage of his employer's match program. He calls it "possibly the greatest investment ever."
How to improve: Call your HR administrator and ask if your company offers an employer match. If it does, designate a portion of your paycheck to the company's 401(k). That's free money, no matter how you slice it.
6. Not establishing savings goals.
You probably have some big goals in life, like getting married, buying a house, and having kids, but have you started saving for these expensive milestones?
It can be difficult to start saving for things that may seem so far off, but if you don't start early, the costs can wreak havoc in the moment.
"You can never save enough," Meaney emphasizes. "There will always be something to apply that towards. The key is that you set goals and prioritize the things that you want and might want down the road."
How to improve: Start by establishing what is important to you and creating savings goals. "Get an idea of what you would have to save, how long you would have to save for, and at what rate of return you might need your investments to grow to reach those goals," advises Meaney, and then start putting away money.
It may be helpful to set up multiple savings accounts in order to save for specific purchases. Check the online interface of your bank and see if it will allow you to create sub-savings accounts.
7. Feeling invincible.
It's easy for young people to feel invincible when it comes to health, or to ignore the possibility of a medical emergency. This invincibility complex is costly, as medical bills are the biggest cause of personal bankruptcy.
Health insurance is mandatory in the US, and people without it are required to pay a fee of 2.5% of your annual household income or $695 per person, per year — whichever is higher.
How to improve: Buy the insurance that you need. Renter's insurance, auto, health, and disability insurance are four must-haves, says Meaney. Check out thisyoung adult's guide to affordable health insurance to get started.
8. Figuring you'll use your credit cards in an emergency.
Once again, it's easy to ignore the possibility of your car breaking down, a medical emergency, or losing your job, but these are all scenarios that could quickly become expensive realities.
According to troubling research from the Federal Reserve, nearly half of Americans wouldn't have enough money on hand to cover a $400 emergency.
Not setting aside money in an emergency fund could ultimately land you in debt or force you to borrow from a long-term savings account if an emergency does arise.
How to improve: Create an emergency fund as soon as possible.
The amount of savings you need is highly personal, so it isn't usually measured in terms of dollars; rather, it's months of living expenses that money could cover should you lose or quit your job. The general rule of thumb: Stash six months' worth of expenses in a high-yield savings or money market account, where you may earn more interest than in a traditional savings account, and it'll still be easily accessible.
9. Not getting a head start on investing.
Investing can be considered the single most effective way to start building wealth. The earlier you start the better, thanks to the power of compound interest, meaning your 20s are critical.
How to improve: Retirement savings are one way to invest, but if you want to get more involved, there are other avenues to explore: Start by researching low-cost index funds, which Warren Buffett recommends, or by looking into the low-cost and low-risk online investment platforms known as "robo-advisers."
10. Leaving your debt for tomorrow.
Student loan debt in particular is often blamed for preventing young people from buying homes and growing their wealth — and that doesn't even touch on debt like car loans or credit cards.
How to improve: If you have debt, it's usually in your best interest to pay more than your minimum payment, thereby reducing the length of your loan and the amount you pay in interest. If you aren't sure where to start, check out 10 simple strategies for paying off any kind of debt.
You also want to be clear about what the interest rate on your debt is, Sherman says, as that could affect how quickly you're aiming to pay it off. If your interest rate is close to zero, you may not feel the same urgency to pay it faster than the normal repayments schedule, as it's costing you less than the higher-interest debt.
11. Not establishing credit.
Your credit score is a three-digit number between 301 and 850 based on how you've used credit in the past, and the higher, the better. Generally, you don't want your credit score to dip below 650, as potential creditors in the future will consider you less trustworthy and less deserving of the best rates.
While often overlooked or forgotten about, building good credit early on is essential. It will allow you to make big purchases, like a car or a home, that rely on credit to prove you're capable of making your payments on time.
How to improve: Start by selecting the right credit card for your spending habitsand make sure to pay it off in full every month to avoid debt.
"While establishing credit is key, don't buy anything that you wouldn't normally pay cash for," Sherman advises. "Overcharging when you're trying to build your credit can be costly."
12. Ignoring bills.
Once you move out of your parents' place, bills become an everyday reality. There's no way around paying your rent, cable, internet, utilities, and various subscriptions.
The smaller bills can be particularly dangerous, Sherman says, as many young people tend to overlook them. "You can't ignore a $10 bill," he says. "The small bills that may seem insignificant will become significant as soon as you let them fester. If you don't pay the minimum, it's going to affect your ability to borrow money in the future."
How to improve: Most bills today can be paid online, and you often have the option of setting up automatic payments. Try automating consistent payments for fixed costs — cable, internet, Netflix, credit card bills, and insurance — so that you don't have to think about them every month. (Although you should still check in on your account regularly to make sure things are going smoothly.)
13. Consistently buying cheap, low quality items to save short-term.
It's tempting to try to "save money" by buying inexpensive, low quality things, but oftentimes those cheap products will cost you in the long run.
While it's good to be aware of pricing, sales, and discounts, it's also important to recognize when you're being cheap, rather than frugal. Being cheap means using price as a bottom line, while frugality means using value as a bottom line.
How to improve: By the time you hit your 20s, it's time to start shopping for value, which may mean cutting back on your trips to the dollar store or the cheapest place on the block. Here are 15 times it's worth spending a little more.