When you are starting out in life, mistakes are part of the process – from ending up in the wrong job, picking incompatible flat mates or running up debts. But this is also the era where you create habits that can last a lifetime.
Financial mistakes made now can have a huge impact later. That missed mobile phone bill payment today could damage your credit rating and one day affect your ability to get a mortgage. Maybe you’ve delayed starting your pension, ignoring the effect this could have on your future retired self, or are dabbling in Bitcoin before building an emergency savings pot.
If this sounds familiar, don’t worry – plenty of people in their twenties and thirties fall foul of common financial mistakes. The good news is that at this time of life, even small changes can make a big difference.
We look at the biggest financial mistakes people make in their 20s and 30s – and what you can do to avoid them.
Doubling down on debt
Debt can be hard to avoid when you are first starting out. Low wages combined with a high cost of living mean that credit cards, overdrafts, loans and buy-now-pay-later (BNPL) services can all be tempting.
Paige Low, 26, knows exactly how easy it is to fall into a debt spiral. The mother-of- two, who lives in Kent, found herself owing £7,000 after gradually building up 15 different BNPL accounts.
What started as a new outfit and a couple of takeaways soon spiralled until Paige was forced to take out a credit card just to keep on top of her repayments.
After she moved home and couldn’t afford the £500 deposit on her new flat, Paige sought help from the charity Money Wellness and arranged a debt relief order.
“That was my breaking point. I had ended up using BNPL for everything, even the food shop and baby formula,” says Paige. “Because of the way the payments are split it seemed cheaper at first, but then the repayments all start coming out at once. It’s confusing and overwhelming.”
A year on, Paige says being debt-free feels “amazing”. She adds: “To anyone going down the BNPL route, I would say: if you can’t afford it at the time, then you just don’t need it.”
If you do need to borrow, think carefully about how you do it. Buy-now-pay-later or short-term loans tend to have high interest rates and strict repayment terms, which can quickly lead to a debt spiral.
Interest-free credit cards can be a smarter way to spread costs if used carefully – but only if you can pay off the balance before the interest-free period ends.
If you have debts, make paying them off a priority. Every pound spent on repayments is a pound you can’t save for the future.
Not building your credit rating
While avoiding unnecessary debt is sensible, it is important not to avoid credit completely. At some point most of us need to borrow money – whether that’s a mortgage or a credit card – and when you do, the lender will check your credit rating, which shows every time you’ve borrowed money and whether you paid it back on time.
Borrowing badly can give you a poor credit rating, but many people don’t realise that not borrowing at all can also mean you have a low credit rating.
Without a credit history, lenders have no way of knowing whether you’re a responsible borrower, which can mean you are rejected for the best mortgage and credit card deals.
Applying for a credit card with a low limit and only using it for basic spending that you can pay back in full each month is one of the simplest ways to build a solid credit history.
Slacking on savings
Saving when younger may feel like am impossible task but it’s important. “It’s a good idea to work towards having enough emergency savings to cover three to six months’ worth of essential spending,” says Sarah Coles, head of personal finance at AJ Bell.
“That’s a big ask early in your adult life, when your income tends to be lower and more stretched, but it’s vital to save whatever you can afford and give yourself a safety net.”
Setting aside even a small amount has two benefits. Firstly, it gets you into the habit of saving, which you can build on as your earnings increase.
Secondly, even small sums can grow significantly over time thanks to compound interest – the snowball effect where interest earned starts earning interest of its own. Save £100 a month into an account paying 5 per cent interest and within four years you could have a pot worth over £5,000.
Don’t forget your ISA allowance either. You can save up to £20,000 a year in an ISA and any growth is free from tax.
Passing up on a pension pot
When you are just starting out, retirement understandably feels like a distant concern. Fewer than a third of Gen Z (those born between 1997 and 2012) prioritise their pensions, according to research from AJ Bell.
It’s a situation that Charlene Mullen, 35, a virtual assistant from Chester is well aware of. In her 20s, her financial priorities were shopping, nights out and saving up to go travelling.
“I became really aware that I was living too much in the present and decided with my partner to start saving for a mortgage deposit,” she says. At the time, that took priority over setting up a pension but Charlene hopes owning a property will help her in later life.
“In my 30s, I wish I’d paid into a pension when I was making a bit more money,” says Charlene, who is self-employed. She says this can make it harder to save for retirement compared to being employed, where under auto-enrolment a pension may have been created for her automatically.
Auto-enrolment means if you are over 22 and earning more than £10,000 a year, you’ll automatically be set up on your workplace pension scheme and money will go from your wages into your retirement savings. But some people opt out, which can prove extremely costly.
Coles said someone paying in £200 a month from age 20 to age 70 could result in a pension pot worth around £740,000. Delaying starting by ten years would cut that total to under £400,000.
Neglecting your pension
But letting auto-enrolment take care of your pension is also a common mistake. Don’t assume that the auto-enrolment minimum pension contribution of 8 per cent of your salary – 5 per cent from you and 3 per cent from your employer – is enough.
If you can afford to save more, try to. Check how much your employer is willing to contribute, as you may find that if you increase how much you pay into your pension your company will do the same.
“As your salary rises, your contributions should rise with it,” says Maike Currie, vice-president of personal finance at PensionBee. “Try directing even a small portion into your pension. Every pound you contribute is topped up by the government through tax relief. For most basic-rate taxpayers, that’s an extra 25p for every £1. It’s as close to free money as you’ll find.”
Linda Harrison regrets not starting to save into a pension soonerLinda Harrison, 53, a freelance PR from York, knows only too well the impact of neglecting your pension.
After leaving university, she travelled the world teaching English before moving to London to become a journalist. “There was no auto-enrolment and I don’t think it even crossed my mind,” she says.
Linda finally started a pension at age 29 but a series of career changes, self-employed periods and maternity leave have left her with a patchwork of pension pots and significant gaps in her contributions.
“At the time I knew it was probably a mistake,” she says. “But life gets in the way.” The reality of her stop-start pension saving hit home recently when a friend’s husband mentioned he planned to retire at 55. “That was a bit of a gulp moment,” she admits. “I doubt I’ll be able to retire before 70.”
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