How to Fix Financial Mistakes Made in Your 20s and 30s

Money mistakes – it’s something everyone does at different times in their lives. Financial mistakes are especially prevalent in a person’s 20s and 30s when experience in managing money is still a new thing. Thankfully, these decisions are not irreversible and it is possible to fix financial mistakes made in these decades of your life.

Take a look at this average scenario of “Jim,” who is 34 years old and makes $55,000 a year:

Debts
A mortgage on $216,000 at 4.5%
A $2,800 car loan at 3%
A $54,000 student loan at 5.5%

Assets
Home equity of $34,000
Retirement savings of $12,000
Savings of $4,000

For Jim -- and a lot of people -- the question becomes what should you pay off first, how do you allocate retirement and other savings, and how do you plan for the future?

Because everyone’s financial situation is different, it is difficult to say exactly how Jim should manage his money. However, Jim could've made the following mistakes without even realizing it. Take a look at the following blunders and see how you can fix financial mistakes made in your 20s and 30s.

Not creating financial goals

It’s hard to create a plan -- for now or in the future -- if you have no idea where you want to go. What are your goals? Attend graduate school? Buy a house? Start a business? At a young age, it’s important to have an idea about your direction. In our example, Jim owns a house which is terrific, but he doesn’t know the best path to pay down his substantial student loans.

If you skipped this part of the lesson early on, it’s never too late to create a financial plan. It is always fluid -- it changes just as your life does. So sit down with a qualified financial planner to see how you can achieve your goals.

Not developing a budget

So often it’s easy to simply live paycheck to paycheck and the next thing you know, you wonder where all your money has been spent. Sure there’s rent, utilities, groceries, insurance, gas… but there were also vacations, clothes, entertainment and restaurant expenses that were unaccounted for. Sticking to a budget allows you to see what you have to cover, how much you can save and what you have available to splurge on.

Not paying yourself first

This is the first step in building an emergency fund. Looking at your budget, figure out what percentage you can allocate for personal spending, savings, retirement and living costs, and then take your personal spending right off the top of your paycheck. You won’t be tempted to live beyond your means when you know exactly how much you have to spend and save.

Not building up an emergency fund

In our example, Jim has $4,000 in savings. That’s a good start, however, he should have at least three times more ($12,000) to cover unexpected expenses. Experts recommend having three to six months of savings put away for a rainy day. And they recommend this for good reason. A health emergency, an unexpected car repair or job layoff can place you in great financial jeopardy that requires you to borrow from your retirement fund or put too much money on credit cards.

Not contributing to your retirement fund

When you’re fresh out of school, it’s easy to think that retirement is so far away that you can get to that later. Vanguard estimates that if you start saving 6 percent of your salary with a moderate asset allocation in a mutual fund, by retirement you would have $359,000. Being young, you can be more aggressive with your investment allocations, and also contribute more toward retirement since you don’t have the responsibilities of kids, college, mortgages or older parents. Again, Jim has a good start with his $12,000 in IRA savings. Contributing to his company 401(k) plan if it is available or making extra IRA deposits of even $100 a month can make a substantial difference in what he has when he retires.

What’s not recommended is liquidating his retirement savings to pay down student loan debt. Jim will face a 20 percent penalty plus taxes because he is under 59 ½, so better to try to cut other expenses than take money out of a retirement fund.

Choosing a car you can’t afford

The ads are alluring for sure. Only $299 per month and a couple of thousand down to lease a luxury car! Who wouldn’t take advantage of that? However, it’s a big mistake. First off, new cars depreciate an immediate 20 percent when you drive them off the lot. From there, they generally depreciate 15 percent a year. So with a three-year lease, your car’s value has gone down by 65 percent. Yet you’re still paying for the full sales price each month. Add in mileage restrictions, insurance and yearly registration, and you’re most likely over your head. Instead, if you need a vehicle, consider purchasing a used one.

Jim’s paying 3 percent on a $2,800 car loan. Assuming he holds this loan for a year, he’s paying about $230 a month for his car. If he purchased a vehicle with cash, he could take the former loan payment and put it toward retiring his student loan debt at 5.5 percent.

Even better, if you live in a city that offers good public transportation then go ride the bus, train or metro. There's also pay-as-you-go car services like Zipcar and decently priced ride sharing cabs like Uber and Lyft that you can use in moments when you actually need a car. It'll be cheaper than making car payments.

Relying on credit cards

Splurging here and there or living on credit cards because you don’t have emergency savings is a dangerous game. Interest rates on many cards can compound and create financial pressure if you’re not the best at managing your money. However, many cards offer perks such as cash back or mileage, which make sense if you can pay them off at the end of the month and then reap the benefits.

Not paying of student loans

This is where Jim is in the deepest amount of debt. Depending on your modified adjusted gross income, the IRS states that you can take a student loan interest deduction to reduce the amount of your income subject to tax by up to $2,500 in for your 2013. Note that many student loans cannot be eliminated through bankruptcy, so it makes sense to pay them off as soon as you can to free your funds up for other major expenses.

Paying too much for a wedding

When you’re in your 20s and 30s, you’re in the prime of your life and may want to settle down. But a wedding often comes with a hefty price tag. TheKnot.com’s 2013 survey notes that the average wedding was $30,000. If you or your family has the money and you want to spend it, go for it. Otherwise look for ways to economize on the big day.

Not having enough insurance coverage

Thanks to the Affordable Care Act, most everyone now has access to health insurance. But not having enough car insurance (collision and comprehensive), homeowners or renters insurance, or personal or professional liability insurance can be a real gamble. In your 20s and 30s, you think nothing will happen to you. Give it time and it will. It only takes one car accident or a slip-and-fall at your backyard barbeque to take a huge bite out of your finances.

Talk with an insurance agent who represents a number of carriers or go online to receive a wide range of quotes.

The great thing is that no matter what your age, you can learn from your mistakes -- both past and present. If you apply just some of these tips, you’ll be well ahead of the game.