The No. 1 mistake Americans in their 20s make with money, according to a CFP

CNBC

3 days ago

Promotions are great, but heed with caution.
The most common trap adults in their early 20s fall for when saving for the future happens around income increases, says Nathan Sebesta, a certified financial planner and owner of Access Wealth Strategies, a financial services firm in Artesia, New Mexico.
In anticipation of a first paycheck or big promotion, Sebesta says many young adults will make lifestyle changes, like buying a new car or renting a nicer apartment, in accordance with or even by more than the raise.
But that isn't necessarily conducive to saving, especially for retirement. Often, "the money is already spent before it even arrives," he says.
Instead, Sebesta suggests taking a more a conservative approach. Try keeping the same standard of living or increasing it by a little, but not proportionally to the raise.
Although "easier said than done," saving for retirement requires discipline, he says.
Here are three strategies Sebesta advises his clients to use to ensure they are putting a healthy amount of money toward their savings.
If you've never done so, going through your bank and credit card statements line by line can be extremely revealing, says Sebesta. Small, unnecessary purchases can quickly add up, easily costing some clients thousands of dollars each month, he says.
Create a framework for your spending, and consider using a budgeting app — Sebesta says his favorite is Monarch — to track your expenses, or work with a financial advisor.
While there are many strategies to pay down debt, Sebesta says he prefers his clients tackle the items that are "screaming the loudest," by addressing their largest debts by dollar amount first and then turning to those with the highest interest rates.
But don't ignore the interest rates on your debt. Credit card debt, which hit a collective record high of $1.21 trillion among Americans in February, according to the Federal Reserve Bank of New York, is especially important to tackle because it often comes with a 20% to 30% interest rate — far higher than what most investments can reliably earn in the market, Sebesta says.
A general rule of thumb is to have enough money to cover a month's worth of bills in your checking account and enough in your savings account to cover three to six months of expenses in case of emergency. After that, Sebesta says you can move on to funding investment accounts like a Roth IRA for retirement.
The breakdown of money in liquid assets, such as a savings account, versus illiquid assets, such as investments in a retirement account that can penalize you if you decide to withdraw money before a certain age, should generally be a percentage equal to your age, Sebesta says. That means in your 20s, you'd ideally have roughly 20% of your money in cash and 80% of your money in the market.
This is because the longer your money is invested in the market, the more opportunity it has to grow exponentially — increasing your potential returns. The returns accelerate over time because each year you're earning returns not just on your initial investment, but also on all previous gains.
"Start as early as you can and save as much as you can," Sebesta says. "Time and the markets are your best friend. You can't get back those early years of investing."
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