Navigating your finances in your 20s is tough enough without everyone and their brother tossing in their two cents about what you should and shouldn’t do. Friends and family may mean well in offering up guidance but sometimes the things they preach are just plain wrong. The MyBankTracker staff isn’t immune and unfortunately, some of us have paid the price for listening to bad advice. Learn from our mistakes and check the dumbest money tips we were given in our 20s (and actually listened to!).
‘Putting student loans in forbearance is no big deal.’
You can defer your loans for a set amount of time after you graduate but once you use it up, the only option for putting off payment is forbearance. I admit that I’ve put my loans in forbearance on more than one occasion, even when I probably didn’t need to. What I failed to grasp at the time was the fact that the interest kept right on creeping up. As a result, I ended up digging myself a deeper hole than what I started with.
If you’re facing a big loan payment each month, forbearance should be your last resort. Contact your lender to find out which income-dependent repayment plans you may qualify for. These options can bring your payments down temporarily until you start making enough to pay more towards your loans. Keep in mind that if you stay on them long-term, it’ll cost you more in interest.
Tip: Income-based repayment plans aren’t available for private student loans but you can make them more affordable by refinancing.
‘You don’t need a down payment to buy a car.’
When you land your first job, it’s tempting to celebrate by upgrading that old beater you’ve been driving since high school but there’s a right and wrong way to go about it. Jumping on a $0 down financing promotion thinking that it’s going to save you some cash is not a smart move.
MyBankTracker editor Claire Tak found that out the hard way. She purchased a Mini Cooper convertible with nothing down and wound up with a $450 a month car payment. She was able to refinance it later to bring the payments down but that involved paying additional fees to cancel out the original loan. “While that car was cute, it definitely wasn’t worth the price,” Claire says. It was an expensive lesson learned, and her next car was purchased used, mostly with cash, and paid off in less than a year.
If you’re set on buying a car, used is the cheaper way to go, especially if you can save up and pay cash. When it comes to new cars, aim to put down 20 percent of the purchase price and make sure the monthly payments aren’t more than 10 percent of your take-home pay. Also, shop around for the best auto loan rates — you don’t have to stick with the one the dealer suggests.
‘Opening multiple credit card accounts is the best way to build credit.’
My dad encouraged me to get a credit card to build my credit history in college so I figured two (or three or four or five) cards was much better than one. By my mid-20s I had a pocket full of plastic and decent accumulation of debt. I’ve since paid it off but it took me years to untangle the mess I made during and after college.
Building good credit in your 20s is a must, especially if you plan to buy a home at some point. Sticking with one or two cards and charging only what you can pay in full each month can keep things from getting out of control. Above all, you need to pay your bills on time consistently. Payment history makes up 35 percent of your FICO score, which is what lenders see when you apply for loans.
‘It’s okay to tap retirement to pay off debt if you haven’t saved a lot.’
Before I started freelancing I worked as a sales rep for a major wireless carrier. The job came with some great perks, including a 401(k) with matching contributions. With basically no effort on my part I accumulated about $12,000 in just over a year. When I left that job, I rolled the money over to an IRA with the intent of saving it but after listening to advice from a friend I got the bright idea to cash it out and use the money to pay off my car loan.
You might be thinking I did the right thing. After all, I hadn’t saved that much money anyway and I was probably paying more in interest for the loan right? The problem with that argument is that I didn’t factor in the lost earnings I could have gotten if I’d left the money alone. That same $12,000 I took out at age 29 might have grown to $137,000 by age 65, assuming a 7 percent annual return. To make things worse, I had to pay taxes plus a penalty on the distribution.
Changing careers is likely in your 20s but you can’t afford to let your retirement money slip through your fingers, even if you think it’s just not a large enough amount. Rolling over your 401(k) to an IRA or to your new employer’s plan instead of just cashing it out sidesteps the tax issue and ensures that your nest egg continues to grow.
‘Your credit score isn’t important if you’re not buying a home any time soon.’
What I didn’t know about credit in my 20s could have filled an ocean, as evidenced by my mishap with credit cards. The concept of buying a home wasn’t on the radar and as long as I could keep getting approved for new cards I didn’t worry too much about my score. Once I was up for owning a home, however, my neglect came back to haunt me.
Preserving your credit score is important at any age and 20-somethings are often starting from scratch with a zero FICO score. Making sure that you’re covering the basics like paying your bills on time, keeping your balances low and limiting your inquiries for new credit can help get you closer to perfect credit.
Tip: Look for a credit card that offers free access to your score each month so you can keep an eye on your progress.
‘Taking longer to pay off student loans doesn’t matter because the interest is so low.’
If you’ve got student loan debt you’ve probably been told at least once that there’s no rush to pay them off since you’re not paying that much in interest. Our editor Claire has heard it time and time again and she estimates that following this advice has cost her roughly an extra $15,000 in interest.
While you shouldn’t completely neglect things like building an emergency fund or saving for retirement, getting rid of your student loans as quickly as possible is in your best interest. Consolidate or refinance to lock in a lower rate and trim your budget to find more money to pay down your loans. Adding even $50 a month to your payments can shave years off your loan term, which in turn reduces what you’re throwing away on interest.
‘You can contribute to your IRA when you’re making more money.’
If you land a job that doesn’t offer a 401(k), opening an IRA can make up for it. A Roth IRA is particularly well-suited for 20-somethings since you won’t pay any taxes on your earnings until you start making qualified withdrawals at age 59 1/2.
I opened my first Roth IRA with Fidelity at age 23, tossed $500 into it and then promptly forgot about it. I waited tables for most of my 20s, despite having a graduate degree (which I got because I followed even more bad advice). Even though I was coming home with cash every night, putting some of it into my IRA was always something I thought I could wait to do.
Fast-forward to a decade later and I’m now trying to play catch-up with my retirement savings. I’m socking away $1,000 a month now but had I started back then, I wouldn’t be facing such an uphill climb. For instance, if you start putting $100 a month into an IRA at 22 and save that same amount until age 65, you’d have a cool $318,000. That’s 318,000 reasons not to listen when someone tells you have plenty of time to save.
Making mistakes is par for the course in your 20s and chances are, you’ll hit a bump or two in the road when it comes to your finances. Taking money advice with a grain of salt and doing your own research on things like credit, debt and saving makes it easier to avoid these types of costly errors.