The 13 dumbest things to do with your money in your 20s

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Young Woman with Hat and SunglassesFlickr / Chris JLSeemingly small money mistakes can become costly in the future.

When it comes to managing money, your 20s are a critical decade.

Time is on your side when you're young, and a head start in saving and investing can result in massive financial gains later down the road.

It's equally important to get into the routine of making smart decisions. "You don't want to start bad habits in your 20s that will lead to potential financial mistakes down the line," Brad Sherman, president of Sherman Wealth Management, tells Business Insider.

To get on track financially, start by avoiding these 13 pitfalls:

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1. Live above your means.

1. Live above your means.

Earning a first paycheck is liberating and thrilling, but it can be dangerous. As earnings go up, purchases tend to creep up as well, until we succumb to lifestyle inflation: living up to the ceiling of what our income will allow.

How to improve: Many people who fall victim to lifestyle inflation don't even realize it, because they've grown accustomed to living that way. Look out for the most telling signs and habits of lifestyle inflation, and learn to combat them.

2. Spend on the wrong things.

2. Spend on the wrong things.

If you're overspending, you're also probably spending your money in the wrong places.

It is crucial to establish the difference between "wants" and "needs," Sherman emphasizes. Once you've accounted for all of your "needs" — such as housing, food, insurance, student loans — 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 — read up on the most common psychological overspending triggers, how stores trick you into parting from your cash, and what you can do to keep from spending.

3. Be unaware of your cash flow.

3. Be 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, and while "budget" may sound overwhelming, it does not have to be the daunting process that people make it out to be. "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: If you don't know where to start, take a look at the insight offered by 14 regular people who keep diligent budgets. There are also many free budgeting apps to help you categorize and monitor your monthly and annual spending.

4. Assume you don't make enough money to start saving for retirement.

4. Assume you don't make enough money to start saving for retirement.

Retirement might seem too far off to start considering, but some experts say that if young people don't change their rocky 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." Obviously, the more you can put towards savings the better, but don't get discouraged if you can only contribute a small percentage early on.

How to improve: If your company offers one, contribute to your employer's 401(k) plan, a common type of retirement account many companies offer.

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 take advantage of your company match.

5. Not take advantage of your company match.

Many companies that offer a 401(k) also offer a 401(k) match program, which is essentially free money. The concept is a simple one: Your company will match whatever contribution you put towards your 401(k), up to a certain percentage.

Of employees age 25 and under, less than one-third participate in a 401(k) and only 16% take full advantage of the 401(k) match — don't be one of the many missing out on free money.

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). Even if you can't afford to contribute enough to get the full match, every little bit helps.

6. Not establish savings goals.

6. Not establish savings goals.

It can be difficult to start saving for things that may seem so far off, such as a home or wedding, but if you don't start early, these expenses will creep up and wreak havoc.

"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." This may be a vacation, a down payment on a home, or graduate school.

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. Feel invincible.

7. Feel 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. It's important to plan for the worst, as an unanticipated emergency could turn your life upside down instantaneously.

In fact, health insurance is mandatory in the US, and people who choose not to have it are required to pay a fee of 2% of your annual household income or $325 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 this young adult's guide to affordable health insurance to get started.

8. Figure you'll use your credit cards in an emergency.

8. Figure 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. 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. A general rule is that it's smart to have six months' worth of savings tucked away, but you may need more or less depending on your situation.

9. Not get a head start on investing.

9. Not get 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 online investment platforms known as "robo-advisers."

10. Leave your debt for tomorrow.

10. Leave 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, consider the advice from 13 real people who paid off thousands.

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 establish credit.

11. Not establish 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 later on, such as insurance, a car, and a home.

How to improve: Start by selecting a good credit card and then focus on establishing smart credit card habits. Just because you have a credit card doesn't mean you have to use it all the time. "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. Ignore bills.

12. Ignore 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.)

For payments that can't be made online, such as rent, set up calendar reminders and get in the habit of paying them around the same time each month so that it becomes an ingrained routine.

13. Consistently buy cheap, low quality items to save short-term.

13. Consistently buy 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. There are plenty of everyday items to invest in that can help you save hundreds or thousands of dollars over the months and years, such as a crock pot, commuter bike, and coffee maker.

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