How to avoid getting into debt in your 20s

Personal finance experts list 8 tips to prevent young adults from falling into the money trap

Young adults are proving to be more vulnerable to the Covid-19 downturn, with many of them facing a global recession for the first time in their lives.Getty Images
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The coronavirus pandemic has affected the finances of millions of people around the world. However, young adults are more vulnerable to the downturn, with many of them facing a global recession for the first time in their lives.

According to a report from financial services firm Edward Jones, which surveyed 9,000 Americans across five generations in May and June this year, roughly a third of millennials (aged 24 to 39) and Gen Zers (aged 18 to 23) say that Covid-19 has had an extreme or very negative impact on their financial security.

Some may have already begun their journey towards financial independence with their first job, while others might still be in university. Both are major milestones, but they have been compounded by Covid-19. This could, however, prove to be an important turning point when it comes to managing money, budgets and having a good understanding of financial literacy.

A study by Visa in 2019 found that 43 per cent of respondents in the UAE between the ages of 16 to 24 say they are not ready to manage their own money, while 53 per cent believe schools do not prepare them enough.

A Merrill Lynch Wealth Management report in 2019, which surveyed more than 2,700 Americans aged 18 to 34, found that only 19 per cent of respondents view financial success as being rich – 60 per cent see it as not having any debt.

We spoke to personal finance experts in the UAE and compiled eight top tips for young adults to avoid debt and other unnecessary expenses to help set them on the path to a financially secure future.

Use credit cards with caution

It’s easy to be buried in a pit of credit card debt if you aren’t careful about repaying the bills on time every month.

The younger generation has a tendency to spend more because of higher card limits, says Vijay Valecha, chief investment officer at Century Financial. They need to make timely payments to cover both interest and the principal amount owed without accumulating new debt in the form of multiple cards, Mr Valecha adds.

Ambareen Musa, founder and chief executive of, agrees. “If you’re only managing to pay the minimum balance each month, you’re certainly headed for financial trouble," she says. "With the high interest rates on credit cards, you could end up paying off your credit card debt well into your 30s and 40s.”

Ambareen Musa of says aspiring homeowners may need to make some cutbacks to save for a down payment. Photo: Courtesy
Ambareen Musa of says aspiring homeowners may need to make some cutbacks to save for a down payment. Photo: Courtesy

She says it is essential for young adults to understand that not all types of debt are created equal, with some costing much more than others. “A borrower with a car loan of Dh50,000 is in a much better financial position than one who owes Dh50,000 in credit card debt,” says Ms Musa.

“While the car loan could come with an annual interest rate of around 3 per cent, the credit card provider would charge a monthly interest rate of around 3 per cent or higher on the unpaid credit card balance every month. If you convert this monthly credit card interest rate into an annual percentage rate, you would be looking at a rate of around 40 per cent per year.”

Young adults should also test their financial discipline before getting a credit card. “Do you have an active income? Do you have the discipline to keep up with your bills and pay your credit card bill at the end of every month? Give yourself the third degree well before getting a credit card to avoid what could be life-altering consequences,” says Sophia Bhatti, founder of Sophia Wealth, an independent financial advisory in Dubai.

You should avoid making CEO-level purchases on an executive's salary

Ms Bhatti adds that it’s best to treat your credit card like a debit card.

“You should avoid making CEO-level purchases on an executive’s salary. If the date that your bills are due on and the date your salary is paid are too far apart, use your credit card and pay what you owe on your credit card when your salary comes in,” Ms Bhatti recommends.

Create an emergency fund

An emergency fund is savings you can dip into when life doesn’t go as planned. It’s your financial cushion if you lose your job, undergo a medical emergency, or have a sudden bill to pay. Typically, an emergency fund should cover six months of living expenses.

“Setting aside some amount of money every month in a surplus cash contingency account will always be a win-win situation in case of sudden emergencies,” says Mr Valecha.

Having an emergency fund will prevent you from applying for a quick loan, which could often come with high interest rates.

Sophia Batti is a wealth manager based in Dubai.
Courtesy: Sophia Batti
Sophia Bhatti, a wealth manager, says youngsters must always keep aside a percentage of their income for their future lives and not spend all that they earn. Courtesy: Sophia Bhatti

Save for the future

Saving as much of your income as possible will count in the longer run. Although young adults might be tempted to live for the moment, this could adversely affect their future.

“The key to understanding personal monthly disposable income is to know the right trade-off between actual income and essential spending needs,” says Mr Valecha.

Don’t spend more than you earn and always sweep a percentage of all income away for your future self, Ms Bhatti says.

“You can choose to save as little as 10 per cent of your income. Once you develop a habit of saving, extend it to other areas of your life. Save for a vacation or expensive dinner instead of making a dent in your current balance and regretting it the next day,” she adds.

Have an education loan? Pay it off first

Although the excitement of receiving a salary can be a big temptation for a newly employed young adult, they must prioritise their education loan commitment over all other expenses.

It is best to prioritise repaying your existing debts early on in your career

“Even making extra payments on top of your monthly instalments can make a big difference in how much you pay overall. It is best to prioritise repaying your existing debts early on in your career, so you can start preparing for future financial commitments such as buying a home,” says Ms Musa.

Steer clear of lifestyle creep

Lifestyle creep occurs when an individual’s standard of living improves as their discretionary income rises and former luxuries become new necessities.

As young adults start earning more, their increased income may create a desire for an upgraded lifestyle, such as a bigger house, a fancier car, designer clothes and expensive holidays.

“The younger generation tend to get carried away by swanky targeted online ads on various social platforms. Spending on expensive branded items will always come with a future burden in the form of new debt or higher interest costs,” cautions Mr Valecha.

Spending on expensive branded items will always come with a future burden in the form of new debt or higher interest costs

With social media influencing perceptions of a “perfect” life, young people may feel inadequate if their home doesn’t look a certain way or if they don’t drive a certain kind of car. This propels people into a dangerous cycle of spending beyond their means, says Ms Bhatti.

“Lifestyle creep can be avoided by knowing the difference between wants and needs. There’s nothing wrong with treating yourself, but opting for an unsustainable lifestyle that weighs heavily on your wallet is far from ideal,” she warns.

Start a monthly budget and stick to it

A budget is a financial planning tool that allows you to plan how much you will spend or save each month.

“Having a budget that prioritises debt repayment and savings will help you avoid the temptation of spending beyond your means. Make sure you stay committed to following your budget, and keep on tweaking it as your financial circumstances change over time,” says Ms Musa.

According to Mr Valecha, having an estimate of “the net surplus/deficit between income and expense will help you to be prepared to cut down on sudden/unforeseen expenses”.

Build up your credit score

Adopt sound financial habits such as paying your loans on time and not using up the available limit on your credit card. This will help you to start building a strong credit score.

“This will hold you in good stead later on in life when you’re trying to qualify for a mortgage, finance a car purchase or take on a small-business loan,” advises Ms Musa.

Get creative with your spending

If young adults struggle with impulse purchases, they must learn to press the pause button whenever the temptation to buy an unnecessary item comes up.

“Give yourself 24 hours to ponder how much you really need it. You might find that in a few hours, you have forgotten all about it and saved what you would have spent,” says Ms Bhatti.

She also recommends cutting corners on daily expenses to save money. For instance, swap branded pasta sauce for the shop’s house brand or skip eating a Dh40 sandwich for lunch by preparing your meal in advance at home.