When you’re in your 20s, you’re likely juggling school, working through the imposter syndrome that often comes with a career, or coming to the realization that life can be really, really expensive. Your finances—and how to manage them—are a throughline in all of these milestones.
Just remember, money is a learned skill. No one is born knowing how to budget, track expenses, and live within their means, so give yourself a bit of grace while you figure it out. It’s also not often taught in schools, and for many, not a lesson our parents imparted on us. But when it comes to money and financial education, Vancity has your back.
TL;DR: 5 common financial mistakes people make in their 20s and how to best set yourself up for success with:
- Budgeting
- Living within your means
- Emergency funds
- Making payments
- Retirement planning
You’ll also hear from Vancity and Aviso wealth planner, Jeanette Jow. She gives some life-and-money hacks on the subject of your finances.
Mistake #1: Ignoring budgeting
It’s easy to spend without realizing where your money is actually going.
Wealth planner Jeanette says, “A lot of people don’t know the amount of expenses they have, and often will put everything on their credit card, then pay off the bill. If you do this, do a deep dive into your bank statements, and go through them line-by-line. Then, go through your monthly spending and see which items are actually necessary. You might be surprised.”
Treat your financial situation like any other aspect of your health. You have to do the work to make sure it’s in a good place, and sometimes (much like therapy), that means taking a good look at what’s going on behind the scenes.
Many people are surprised to see how much they’re actually spending, which is why it’s so important to create a budget. Just under half (49%) of Canadians report budgeting, and those who do are far less likely to fall behind on financial commitments (8% vs. 16%). Plus, budgeting will help you to achieve your lifestyle goals, like being able to go on an annual vacation or purchase a luxury item.
You can make budgeting work for you by following a three-pronged approach.
1. Take a good look at where your money is going.
It can be tough to take a long look at where your money is going, and not knowing is often less scary than sitting down and sorting it out. But not knowing doesn’t change anything about your financial situation. The situation remains the same whether you’re aware of it or not.
“It can be really hard to sit down and sort it out. And that’s why I always advise people who want to, to start saving even just a little bit. It doesn’t matter what the amount is in the beginning. Just that you pay yourself first,” says Jeanette Jow.
Treat your financial situation like any other aspect of your health. You have to do the work to make sure it’s in a good place, and sometimes (much like therapy), that means taking a good look at what’s going on behind the scenes.
2. Know that’s needed, what’s wanted, and your goals.
Once you know where your money is going, you can figure out which of your costs are “wants” and which are “needs.” Needs are living expenses like groceries and housing, while wants are the extras that make life enjoyable, like tickets to the movies or a night out with friends.
Be sure to write down your long, medium, and short-term financial goals, too. Short-term goals cover immediate things like paying off your credit card debt or buying new shoes. Medium goals are vacations or things you want to strive for in one to three years. Long-term goals are future events, like buying a home.
3. Allocate your money, they follow the plan.
You’ll want to allocate most of your budget to your “needs,” some to your “wants,” and some to your long, medium, and short-term goals. This will give you a big-picture look at what your spending should be daily, weekly, and monthly.
Jeanette says, “Your next step is to split your money into three buckets. The first, short-term, is for day-to-day expenses, like your phone bill or rent. The second bucket is for medium-term goals, like saving for a vehicle, which you might need within one to three years. The last bucket is for long-term savings—four years or more, like retirement.”
“Short-term funds should stay in a checking or savings account for easy access,” says Jeanette, “while medium-term funds could go into investments like GICs for better growth. Long-term savings may do best in stocks, bonds, or mutual funds, something that will give you growth over time.”
These days, plenty of user-friendly budgeting apps are available to help you plan and stay on track.
If you have your heart set on a specific luxury item, it’s a smart idea to save up for it over time as one of your budgeted financial goals.
Mistake #2: Living beyond your means.
It’s easy to spend more than you make if you’re not paying attention. But living like a hermit isn’t sustainable, either.
You need to be able to find a balance between spending too much and not enjoying your life. Don’t listen to those who say if you buy an avocado toast every now and again, you won’t be able to afford a home. You deserve the avocado toast and the home.
Something to be wary of is putting large and unnecessary purchases on credit cards or other loans. For example, a new car can seem like a ‘need’—you need to commute, after all. But there are more economical choices that won’t create debt for you, like a used car that doesn’t come with monthly payments or alternate means of transportation.
If you have your heart set on a specific luxury item, it’s a smart idea to save up for it over time as one of your budgeted financial goals.
Tracking your expenses, as we outlined in the budgeting section above, will help you live within your means and avoid going into unnecessary debt.
“It doesn’t matter what the amount is. It could be as simple as setting up an automatic deposit on the day you get paid to be redirected into a tax-free savings account. Maybe it’s $25 a month, maybe it’s $50. It’s just important to start.” – Wealth planner, Jeanette Jow
Mistake #3: Not having an emergency fund.
No one wants to imagine the worst happening. But, unfortunately, the worst tends to happen.
While saving for an emergency fund can be difficult when you’re just starting out, it’s better to be prepared than caught without. Surprise costs like breaking your arm and not being able to work, having your car break down, or needing to take your beloved pet to the vet don’t give you time to adjust your budget.
Canada’s Financial Consumer Agency recommends saving either the equivalent of 3 to 6 months of regular expenses or 3 to 6 months of your income. This can seem like a daunting amount, so start small and be consistent. Emergency funds are not instant; people often build them over months and years.
“I know people say this all the time, but it’s important to start saving for an emergency fund, even in your 20s,” says Jeanette. “Stuff happens, like when you drop your phone and suddenly need $1,200 to replace it, and you don’t want to be caught out. The standard recommendation is 3 to 6 months of income saved up, and even though that seems like a lot, just start small and make it a habit. And put it in an account you can’t touch.”
Jeanette recommends always paying yourself first. “It doesn’t matter what the amount is. It could be as simple as setting up an automatic deposit on the day you get paid to be redirected into a tax-free savings account. Maybe it’s $25 a month, maybe it’s $50. It’s just important to start.”
Mistake #4: Skipping student loan payments.
It can be tempting to skip a student loan payment, or any other monthly payment for that matter. But it’s important to remember that skipped payments can damage your credit score.
It’s tough to have a huge chunk of money come out of your account for bills all at the same time. Jeanette says, “You can split it up into bi-weekly payments, so you pay less all at once, and spread it out over the month. And if you’re paying smaller amounts more often, you might be able to increase the amount you put down. For example, if you paid $50 bi-weekly, you would pay $1,300 in a year. If you paid $100 monthly, you would pay $1,200 in a year. But it feels easier to manage having $50 come off of your paycheque vs. $100.” Plus making bi-weekly payments could save you more money on interest and help pay down your loan faster than you would by making payments once a month. By making payments every two weeks, you will make 26 half payments per year instead of 12 full payments. Although each payment is half of the monthly amount, you will end up paying an extra month per year with bi-weekly payments.
If you’re struggling with making your monthly payments, don’t just skip them. Consider putting a new payment plan into place; with government student loans, you can do this directly on the website.
“Compound interest is powerful, especially when you’re young,” says Jeanette. “Over time, your investments grow not just on the initial amount but also on the accumulated interest. So, the earlier you start, the more you can benefit from that compounding effect.” – Wealth planner, Jeanette Jow
Mistake #5: Neglecting your savings.
Picture yourself in the future: Where do you live? What kind of lifestyle do you have? Do you go travelling or try new hobbies? Being able to afford the retirement life you want can start in your 20s.
For most Canadians, retirement happens around age 65. So, planning your retirement savings can feel low on the financial priority list. And while we agree that 45 years gives you a ton of time to save for retirement, we would be remiss not to mention the glorious advantages of compound interest.
Compound interest: What is it, and why you should take advantage of it.
Compound interest is when you earn interest not just on the money you originally put in (the principal) but also on the interest that builds up over time. Think of it like a snowball rolling down a hill: As it rolls, it picks up more snow, getting bigger and bigger. In the same way, your money grows faster because each time you earn interest, that interest adds to the total amount, which then earns more interest in the next round!
The longer your money is invested, the more time it has to grow through compounding, which makes a difference whether you start investing in your 20s or later in your 30s. Consider if you are saving at age 20 vs at age 30—if you invest $5,000 at 5% interest for 45 years, you will have almost $45,000. If you invest the same amount for 35 years, you will only have just over $27,500.
The point is that the earlier you start putting money into an account with compounding interest, the more money you’ll make off of your savings. And don’t we all want our money to make money?
“Compound interest is powerful, especially when you’re young,” says Jeanette. “Over time, your investments grow not just on the initial amount but also on the accumulated interest. So the earlier you start, the more you can benefit from that compounding effect.”
Mistake #6: Not getting support (especially when it’s free).
You see a dentist for your teeth. A therapist for your mental health. And a doctor for your physical health. You should have an advisor for your finances.
By seeing a wealth professional and being mindful of common money mistakes, you can set yourself up for a secure financial future. Embrace budgeting, live within your means, build an emergency fund, stay on top of your payments, and save what you can.
All of these things together can seem like a lot—but Vancity can help you sort out what to prioritize and how much to budget with your money.
At Vancity, we are committed to supporting our members and the community and socially responsible investing options. Regardless of where you are in your life stage, when you work with Vancity, you are not left to figure it out on your own. Instead, you will collaborate with your advisor who will take a holistic approach to planning. The best part is creating a plan and receiving personalized financial advice with an advisor at Vancity is absolutely free!
Mutual funds and other securities are offered through Aviso Wealth, a division of Aviso Financial Inc. The information contained in this article is from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This material is not intended to be investment, tax or other advice and should not be relied on without seeking the guidance of a professional to ensure your circumstances are properly considered.
