We Asked A Finance Expert About The Biggest Money Mistakes People Make In Their 20s

Learning what to do with your money is a lot like learning that your face is too round to pull off bangs, in the way that it’s a long and confusing process.

It’s normal to make mistakes, and hopefully we come out the other side just a little bit smarter.

We can’t help with your bangs (good luck!) but we can help you get a better grip on your money habits. To do that, we spoke to Besa Deda, the Chief Economist at Bank of Melbourne, about the biggest mistakes people make with their money in their 20s.

Not investing

One of the most common mistakes young people make is not investing their money because they think they’ll have time to do it later in life, Besa says.

You could invest in property or, more likely, the share market, which has a low barrier to entry and can offer good returns.

“The share market goes up and down and the economy goes through cycles,” she warns. “The real advantage of investing when you’re young is you have a long time horizon to look through the ups and downs, as well as some of the noise and volatility.”

Basically, the longer you invest for, the more time you’ll have to recoup any losses and to benefit from the good times.

Besa recommends starting with blue chip shares. These are the stocks of major companies that typically have a good financial record and usually pay dividends.

She adds that young workers should not ignore their super either. It’s an investment that will be very important when you’re older. If you can’t afford voluntary super contributions, at least be aware of how your super works.

Thinking you need to be rich to invest

Even a small investment now can earn you a big profit in the future.

“You don’t have to have a lot of savings to start investing. You can start small. The power of compound interest is enormous,” Besa says. “Money makes money, and then that money makes more money, and then that money makes even more money.”

You can start with just a few hundred dollars, depending on what’s realistic within your budget. To begin, you might want to set up a separate savings account and move a percentage of your earnings immediately into it so that you’re not tempted to spend that amount on other things.

The Bank of Melbourne app, for instance, lets you set up automatic transfers so that every time you get paid, a certain amount of your salary goes into a separate account that stays out of sight and out of mind. When you’ve hit your goal, you can withdraw the money and invest it.

Keeping all your money in one place

One of the worst things you can do with your money in your 20s is keeping it all in a long-term savings account.

“If that’s the only thing you’re doing then you’re not diversified because all of your money is in cash, and the return on cash is very low compared to other asset classes,” Besa says. “Building wealth is more difficult if you just stick your eggs in one basket.”

Instead, try to invest across asset classes and also diversify within asset classes. For example, when you invest in the share market, try to invest in shares across different industries like banking, resources, and consumer stocks. When you invest in cash, try to keep some money in a high-interest account. That way, if something happens to one investment, those losses will be minimised by possible gains in other investments.

Relying on cryptocurrency

“There’s no doubt that cryptocurrencies have escalated in value this year,” Besa says. “However, they’re also highly speculative and volatile.”

Do your research before you invest in cryptocurrencies. Make sure you have a good understanding of how it’s mined, regulated, and how you use it – and of the risks involved.

Thinking you’re alone

If this still sounds confusing, it’s because it is. That’s why you might want to consider seeing a financial planner or adviser – they can help you decide what to invest in and when, or even do it for you.

Before you make an appointment, though, figure out what you want from them. You should have a clear idea of how much money you want to invest and how much you want to end up with. Knowing what your financial end game is will help you get there. Also decide ahead of time if you want advice about budgeting, super, or insurance, and a single appointment or ongoing advice?

Your bank probably also offers some kind of financial advice. Bank of Melbourne customers can find out more about the different ways to invest and get help starting out here.

At this point, we’re all pretty aware of why we should have a budget and bucket accounts for different expenses. The next step is knowing what to do with our money to earn more.

Investing may seem like something only finance bros bother with, but it’s something we should all be doing.

“The aim is to grow wealth over time,” Besa says. And the sooner you start, the more you’ll be able to grow.

—

Say hello to safe and easy money management with the Bank of Melbourne app and open a new bank account online in just three minutes.

Subject to Internet Banking Terms and Conditions and Mobile Banking Terms and Conditions.

This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice. © Westpac Banking Corporation ABN33 007 457 141 AFSL and Australian credit licence 233714.

—

(Lead image: Midas Hofstra / Unsplash)