This article appeared on Barrons.com

Retirement savers in their 20s can afford mistakes since even modest investments can grow into hefty sums given 40 years to compound. But avoiding some of the most common missteps young savers make can serve to enhance those savings, and returns, over the long term. 

Darren Zagarola, Senior Wealth Advisor and Principal of the fee-only financial planning firm EKS Associates, says today’s graduates who are just joining the workforce and younger workers generally should watch out for six common financial mistakes as they take the first steps toward their retirement goals. 

“It is important to start with good financial habits,” Zagarola says. “Avoiding money mistakes in your 20s and becoming educated on wise investment strategies can make a huge difference as you enter your 30s and 40s, and even have an impact on how and when you choose to retire, as far away as that might seem.”

● Not creating a budget and savings plan: Entry-level workers often don’t believe they earn enough money to save, Zagarola says, but they typically are surprised when they track their monthly income and expenditures and learn to cut costs. Online tools such as Quicken, Mint, and NerdWallet can help them identify areas where they are spending too much and adjust their budgets accordingly, he says.

Saving should be part of workers’ monthly budgets, whether that means automatic contributions to an employer-sponsored retirement account, automatic transfers from their bank account to a brokerage account, or both, Zagarola says. 

“Make sure that when you’re saving that money, it’s a percentage of your pay so that when you get a pay raise, your savings gets a pay raise, as opposed to just putting in a specific dollar amount,” Zagarola says. “Treat your savings like an expense. This is monthly cash outflow.”

● Not having an emergency fund: Zagarola says workers should establish an emergency fund to get them through a setback such as losing their job or getting injured. Just as monthly savings should be treated as a recurring bill, he says, so too should contributions to an emergency fund, until workers have socked away about six months of income. 

While it’s almost cliché to talk about the emergency fund, the pandemic has made apparent its utility. “The pandemic has reinforced the idea that you need to have three to six months of cash needs [on hand] because your job is not guaranteed in any industry in this country, and you need to be prepared,” Zagarola says. 

When laid-off workers have no financial cushion, they may have to take the first job opportunity available, even if it’s a bad one. “Having that reserve fund gives them flexibility in their decision-making process,” he says.

● Not contributing to retirement accounts: Young workers sometimes decline to participate in employer-sponsored 401(k) or similar plans because they’re afraid of market volatility or feel that they don’t earn enough money to save consistently, Zagarola says. But this can be an especially costly mistake because investments made early in life compound tax-deferred over many years, typically producing healthy returns.

Zagarola says workers should contribute as much as they can to their 401(k), but at least enough to fully take advantage of any matching contributions from employers. Workers who lack access to an employer-sponsored plan should consider opening an individual retirement account through a discount brokerage firm, he says. The key is to start early, save consistently and let that money grow over several decades. 

For younger employees, a Roth 401(k) may make sense because they will be paying taxes now, while they’re in a lower tax bracket, instead of in retirement. 

● Avoiding the stock market: “Once you have an emergency fund established and have started contributing to a retirement plan, it is time to consider an investment portfolio,” Zagarola says. Yet, having witnessed the financial crisis of 2008 and the Covid-19 pandemic, many young workers may be skeptical of the market, so they either invest too conservatively or don’t invest at all.

Zagarola says young adults who saw stock prices plunge 40% to 50% during the two most recent recessions may have been scarred by those experiences, but need to remember that time is on their side. Equities came roaring back in both instances, so the stock market remains “the best place long term” for young workers to put their savings, he says. 

● Not managing debt and maintaining a good credit rating: Consumers with bad credit pay higher interest rates when they purchase a car or home, and those additional dollars can’t be saved for retirement or emergencies. Zagarola says young workers should establish a good credit history by charging all or most of their expenses and immediately paying them off. 

“It is important to understand that if you are only making minimum payments on credit-card debt, the interest you are paying on the outstanding balance could be significant over time, even doubling the amount you have to pay,” he says.

To learn about your credit rating, request a free credit report from AnnualCreditReport.com, he says. You are entitled to a free copy of your credit report every 12 months from TransUnion, Experian, and Equifax, so he recommends requesting a report from a different credit-reporting agency every four months. Workers should review each report carefully to ensure everything is correct, he says.

Having a budget helps workers avoid missing payments on student loans, auto loans, mortgages, and credit cards, which will preserve their credit rating, he says. For workers with credit-card debt, Zagarola recommends looking for a credit card offering 0% interest on balance transfers, allowing them to pay down their debt much more quickly. 

● Not having insurance: Young workers on a tight budget sometimes try to save money by going without insurance or by purchasing substandard insurance products at discounted rates, including health, auto, renter’s, and homeowner’s. By doing so, they become more vulnerable to financial setbacks that threaten to consume their retirement savings, Zagarola says.

“People look at things based on the premium. They don’t look at things based on the coverage,” he says. “You need to make sure that you’re properly insured for what you have. You’re working hard to build your assets; you should work equally hard to protect them.”

Read Darren’s other articles on money mistakes people make in different decades of their lives, and how you can better prepare for long-term financial success, no matter how old (or young) you are.

Read 11 Common Money Mistakes People Make in Their 30s

Read 10 Common Money Mistakes People Make in Their 40s

Read 10 Common Money Mistakes People Make in Their 50s

Read 11 Common Money Mistakes People Make in Retirement

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