A young financial coach with a net worth of over $500,000 said that people in their 20s often make money mistakes because they usually lack personal finance experience.
Michela Allocca, 28, is a personal finance coach specializing in helping young professionals and the author of the book “Break Your Budget.” According to documents reviewed by CNBC’s “Make It” section, Allocca, who has successfully navigated what she calls the “unusual period of figuring out how to manage income after college,” now has a net worth exceeding $500,000.
According to Allocca’s experience, here are five common money mistakes that could lead you to unnecessary debt or miss out on wealth accumulation.
“Lifestyle creep” refers to the phenomenon of your living standard increasing as your income rises. However, overspending beyond your actual means is common and tempting, according to Allocca.
When it comes to significant recurring monthly expenses, lifestyle creep poses particular risks, such as financing a new car or renting a more expensive apartment. These upgrades in spending may happen faster than you expect.
Allocca advises, “You need to consider this payment in conjunction with your income and other expenses.”
Allocca chose to live with roommates, allowing her to invest her savings and achieve a high net worth.
She stated, “Traditional savings accounts offer no advantages.”
High-yield savings accounts, usually offered by online banks or credit unions, typically feature interest rates higher than those offered by major banks for traditional savings accounts. Currently, you can find high-yield savings accounts with interest rates exceeding 5%, while the average interest rate for overall savings accounts is only 0.58%.
For Allocca, opting for a high-yield savings account was a decision that required little thought.
Allocca emphasizes the importance of tracking your expenses to create a reasonable budget. She suggests categorizing expenses for essentials like rent, utilities, as well as non-essential spending on entertainment, travel, etc.
She said, “If you don’t track your expenses, there’s a 99.9% chance you’re underestimating how much money you’re actually spending.”
She recommends “Weekly Financial Check-Ins,” spending 10 minutes reviewing your expenses, which can help you plan how to spend money the following week and alleviate financial anxiety.
Allocca believes that only paying the minimum amount on your credit card does not benefit you in any way.
“You should pay three to four times the minimum amount monthly,” she said, or over time, you will end up paying more in total interest.
She points out that in principle, you should only use a credit card for items you can quickly pay off; otherwise, “If you can’t afford it, you shouldn’t buy it.”
Investing in your 20s, whether through retirement accounts like a 401(k) or purchasing stocks through brokerage accounts, can ensure your financial independence in the future.
While investing carries risks, the power of compound interest means the money in your investment account grows exponentially over time. With compound interest, the earlier you start contributing, the more time your money has to grow.