This is the first decade many of us move away from our parent’s homes and venture out into the world on our own! I remember the moment I left my mom’s house to go to college. It was a little sad and extremely exciting! I didn’t exactly feel ready to leave, but I had no choice! My mom was so happy for me, but somehow we both knew that this was final. I would not be moving back in with her. I visited on the weekends, but somehow my home was no longer the same. I was an independent adult!!
The transition into adulthood felt very abrupt. Suddenly, I had to learn how to use money. While my parents kind of taught me basic things about finances, I was nowhere near as prepared as I could have been. I’m writing this post to help you, as a young adult, get through your 20’s with as little financial troubles as possible. I had so much fun in my 20’s. It’s a very stressful but exciting time in your life. So, I want to help you learn these money mistakes to avoid in your 20’s so you can make the most out of this decade!
Money Mistakes to Avoid in Your 20s
1. Not Investing Your Money
Compound interest is real! The sooner you start investing your money, the more time it has to grow. Even if you only invest $50-100 every month into your retirement fund, that is better than nothing! Play around with this compound interest calculator to get a good sense of what might happen to your hard-earned cash over time! Trust me, you will fall in love with compound if you give it a chance.
So, how do you start investing? That depends. Most people with jobs have a 401(k), 403(b) or some kind of retirement account through their employer. If you are lucky enough to have access to that kind of retirement account, you should definitely start putting money into that account every month. If you don’t have access to a 401(k) or 403(b), consider opening a Roth IRA and investing your money through this account. When you’re ready to retire, you will be glad you started early!
2. Buying a New Car
Cars are expensive and they depreciate quickly! I know it’s tempting to impress your friends or family. It’s also tempting to splurge on a car after being in college for 4 or more years, but spending your money on a brand new car must be avoided! You don’t need to drive a BMW or Nissan 350z despite how cool they look! Trust me. As soon as you take that car off the lot, it will depreciate. In about 4-5 years, new cars depreciate by about 50%. One minute after you drive the car off the lot, the price drops by about 10%!!! That’s a $3,500 drop in price off a car that costs $35,000!!
Cars are fun and very important, but make sure you spend your money wisely when selecting a car during your 20’s. I don’t want you to end up paying thousands of dollars or significantly reducing your monthly cash flow because you have a hefty car payment. Check out this post by Dave Ramsey for advice about buying a new vs used car.
3. Borrowing too Much Money
Most people in their 20’s don’t make a lot of money, especially during the college years. Also, be extremely careful about how much you end up borrowing. If you need money, find a job that will help you cover your expenses. College tuition already costs a lot! I encourage you to minimize how much you spend with the goal to finish college with as little debt as possible! Your future self will thank you!
4. Attending an Expensive University
Going to college is extremely fun and many people want to experience life away from their parents. There is nothing wrong with that! However, I caution you to be careful when considering universities. If you move out of state your tuition costs can easily be double. You also miss out on any grants and scholarships that are offered only to in-state students. Private universities also cost lots of money and if your family can’t afford the tuition, often times the student must take out loans to attend. Sometimes these loans take decades to pay off.
I attended an in-state, public university for my undergraduate degree. Since I was a state resident, I qualified for a low-income grant through the state that allowed me to attend this university for FREE!!! I also want to add that state universities often provide excellent educations! Look into your state’s grant programs and compare the tuition at both in-state and out-of-state schools. When you apply for programs consider attending the ones that offer both excellent financial support and education.
5. Taking out Student Loans
In addition to selecting a really good school that won’t burn a hole into your wallet, make sure you to only take out as much as you need for your student loans. If you have extra money, see if there is a way to pay it back to the school/bank or simply borrow less money next quarter.
When I was in college, I did not follow this advice. Instead, I spent thousands on trips and dental braces. Today, I look at my student loans and I am positive that I could have shaved off $10,000+ dollars from my loans if I had been more careful. Don’t fall into the same trap as me!!
6. Going into Credit Card Debt
Credit card companies target college students because they know a couple things about you:
- You have no money
- You don’t understand money
They like to hang out on campus and hand out cool swag like T-Shirts or sunglasses in hopes that you will open a credit card with their bank. My advice is to avoid them! They do not have your best interest in mind. Credit cards are great tools for people who have the money to pay off the balance every month, but until you are in that position, promise me you won’t open the account.
7. Spending too Much on Your Living Expenses
Some college towns are really cheap, while others are very expensive (looking at you San Fransisco and Seattle). Regardless of what city you end up living in during college, find a roommate to help you share your living expenses. Roommates are so normal in college that it’s almost expected that you have one or more!
You will save thousands of dollars on your living expenses if you find a roommate while you are in college.
8. Living on Borrowed Money
Avoid living on someone else’s money while you are in college. You seriously don’t need that kind of drama in your financial life. By living on borrowed money, you effectively reduce how much wealth you can build in the future. Most people spend the majority of their expenses on living and food costs. If you are using borrowed money to live, you will put yourself into deep debt that you simply don’t need.
You can avoid this a couple ways:
- Have a part time job
- Live with other people
Some people become resident advisors (RAs) during college, which will pay for the cost of your living expenses. Others pick up jobs in libraries, research labs, or local businesses. Find a job that suits your schedule and make as much money as you can to lower the amount of loans you accept from the bank.
9. Not Having an Emergency Savings
Emergency savings are intended to prevent you from going into debt when you are in an emergency. For example, if your car unexpectedly breaks down and you need to repair it (or buy a new car), the emergency savings should cover most, if not all, of the cost. These funds are so necessary for everyone regardless of age! You seriously never know when you might need the extra money. I recommend at least $1000, but ideally, you should save 3-6 months’ worth of expenses.
10. Shopping Therapy
After being in college for a couple of quarters, I fell into the trap of shopping therapy after my final exams. There is nothing wrong with updating your wardrobe or replacing an old pair of shoes. In fact, I hope you do buy yourself new things from time to time. However, don’t use shopping or spending money as a means to relax after a long quarter.
Instead, find a way to unwind that doesn’t revolve around spending money. Perhaps, get together with some friends and watch a movie on netflix or go to the beach for a barbecue. Keep those dollar bills in your pocket and find a way to make lasting memories with your friends instead.
Once I learned not to resort to shopping therapy, I found myself having way more fun being with my friends.
11. Going into Debt for Your Wedding
For some reason, weddings cost as much as the down payment on a house! In some cases, I honestly feel that people spend more money on their weddings than on their house. Look, everyone deserves to be happy and celebrate their wedding day, but please don’t take out loans to celebrate. This financial burden is not a good way to start off your marriage.
There are plenty of options to have a fun and beautiful wedding without breaking the bank!
12. Opening too Many Credit Cards
Some people fall into the trap of credit card rewards and open many credit cards to take advantage of these reward systems. However, this is definitely one of the money mistakes to avoid in your 20s! These reward programs can be overwhelming because, in many cases, you have to spend a large amount in a short period of time. If you open too many cards, you won’t have the money to pay off the balance at the end of the month. As a result, you end up in debt, which is not worth the reward!
Only open credit cards when you are in a good financial position where you are confident that you can and will pay off the balance at the end of every month.
13. Eating Out
Eating out can be dangerous for your wallet! After finishing college, it’s tempting to spend your money on nice things like beautiful dinners at gorgeous restaurants. Again, be careful with your spending after graduating from school. Actually, be careful with your spending even if you don’t go to school!
I understand it’s really fun and maybe you don’t have time to pack your lunches or cook meals, but look for alternative ways to feed yourself and your family that don’t cost $20/meal. I found myself spending a lot of money on food until I started thinking about how much money I spent each day. If you would like a breakdown of how I reduced my grocery budget, send me an email or write a comment!
14. Spending More than You Earn (and Also Not Realizing it)
I spent way more money than I made when I got my first serious job. I went to dinner almost every night with my friends. I also spent lots of money on weekend getaways and trips All for what? Nothing. I went years without accumulating very much savings and investments. Sure, I paid off some of my student loans during that time, but I could have been so much more intentional with my spending. I missed out on a lot of opportunities because I was too preoccupied with fitting into my friend group. Unfortunately, that kind of behavior leads to really bad spending habits.
You can spend time with your friends, but at least track your expenses so you aren’t making the same mistake that I made! If you are interested in learning more, check out my post all about tracking your expenses!
15. Wasting Food
Food is expensive. It is also not good for the environment to buy tons of food only to later throw it away. For some reason, when I was in my 20’s I decided to follow a meal plan. This was a very detailed plan that outlined exactly how many ounces of rice, vegetables, meat, or nuts that I was supposed to with every meal. Sometimes, I ended up with leftovers that I throw away because they did not fit into my macros.
Don’t throw the food away! If you are worried that something you cooked will go bad, freeze it and save it for later! Buy only enough food for a couple of days and restock after you eat everything. Check out my blog post if you need more tips on how to save money on groceries.
16. Rushing to Buy a Home
Houses are almost everyone’s dream purchase. Unfortunately, they are simply expensive and out of reach for a lot of people. There’s is nothing wrong with renting, especially if you are not in the right financial position to buy a house.
There are so many costs to homeownership that you really need to make sure your finances are in order before you purchase. Costs to consider include, closing costs (~5% of list price), down payment (3-20+% of list price), taxes (varies depending on state and city), homeowner’s insurance, utilities, maintenance, HOA dues, home repairs, and upgrades. The list goes on and on! Trust me, I purchased a house recently, and this is not a purchase that should be rushed.
Some people purchase homes without considering the entire cost of homeownership. As a result, they may end up in debt or lose their home. This is one of the biggest purchases you will likely ever make, so be calculated and make sure you have enough money before you commit.
17. Going on Expensive Vacations
Vacations are fun! But you can still have fun on a budget vacation! Think of ways to save money like, staying in a hostel or AirBnB. Consider booking your trip during the off season. Social media tells us that we aren’t living our lives if we aren’t traveling, but there are so many cheap alternatives! For example, I find lots of joy from going camping or taking road trips. I know you can find budget alternatives for yourself, too.
18. Not Knowing Your Net Worth
I honestly didn’t know my own net worth until very recently, but I can tell you that a couple of years ago, my net worth was most likely negative, and I had no idea. It’s important to know your net worth because this gives you a starting point to create financial goals. Perhaps you want to pay off your debt, or retire in 10 years. You can’t plan these goals without understanding how much money you have available. If you have a negative net worth because you are in debt, then you can focus on getting out of debt and paying off those loans.
If your net worth is positive, you can continue investing to meet your short and long term financial goals as efficiently as possible!
19. Spending without a Budget
Budgeting is very important, especially when you are new to the world of personal finance. Unfortunately, I didn’t budget for many years during my 20’s, but I am certain my financial position is in a good place today because I started budgeting.
Budgeting can be tedious starting out, but it will help you tremendously in the long run! If you get good enough at staying within your budget, you can even consider following an automated budget (also called “paying yourself first” or “the antibudget”). This is my favorite method of budgeting because it’s automatic and takes very little effort on a monthly basis. However, it takes time to develop the right habits to follow an automated budget. Check out my blog post all about budgeting to achieve debt freedom if you want to learn more!
20. Missing out on Employer Retirement Matches
This is one of the most essential money mistakes to avoid in your 20s. Employers often have match programs where employees contribute a certain amount of money toward retirement and the employer matches that amount to a certain point! This is free money!! You should at least contribute enough to take advantage of your employer’s match program. Reach out to your human resources department if you need help making contributions or if you don’t know whether your company offers an employee match.
21. Giving into Lifestyle Creep
Lifestyle creep is the concept where we tend to spend more money as our income increases. For example, maybe in college, you ate lots of top ramen. Then you graduate college and you make a full-time income. Now that you earn more money, you buy better food that costs a little more (or in some cases, a lot more). If you want to gain financial independence quickly, avoid lifestyle creep for as long as possible. This will help ensure that you spend less than you earn so you can pay off debt and build wealth!
If you are already experiencing lifestyle creep, don’t worry! There are still ways to change your habits and control your spending by tracking your finances and creating a budget.
22. Marrying the Wrong Person
This is a hard one. I went back and forth over whether I wanted to include this point in my post. However, I decided to add it because bad marriages, unfortunately, cause huge financial burdens on people. Before you get married, make sure you and your partner are on the same page in terms of finances. Find someone who has similar goals as you, and if you find your partner doesn’t have those same goals, look for some kind of middle ground. This can be a tough conversation but it is well worth it!
Also, make sure to have conversations about pre-nuptial agreements to protect yourself and your spouse before you tie the knot!
23. Not Putting Effort Into Your Career
Your 20s is perhaps the best time to put lots of effort into your career! You have the time and energy to go to school, find internships, and learn as much as you can! This is the time to build a solid foundation for the rest of your career! Work hard so that you can qualify for promotions, bonuses, and other perks offered by your workplace.
24. Not Saving Windfalls
Sometimes, we get lucky and stumble upon large sums of cash. Maybe you inherit money from a family member or receive money from an insurance claim. In some cases, it’s a lot more money than we’re used to seeing.
There are so many stories online about people who inherit large sums of cash, like thousands of dollars, and they spend it on terrible things! For example, there is one story of a young man whose dad passed away. His dad was really wise and had set up a will. As a result, his son inherited $350,000. But, instead of investing that money with the intention of financial freedom, the man spent the money buying used cars from his friends. He continued buying used cars until all the money was gone. *Sigh* If that guy had put his money into an index fund instead, he may have doubled his money in 7 years. Don’t be that guy! Save your windfalls. If you want to learn more about investing in the stock market, read Jl Collins’ Stock Series blog posts.
25. Spending Money on Luxury Items
Have you ever heard of the term “Keeping up with the Jones’s?” It’s the idea that we need to buy bigger and better things to impress our friends, families, and neighbors. Then all of the sudden, you have 20 expensive purses that you never use because you’re afraid to dirty them. Or you have a car payment you can’t afford. This is a money mistake to avoid in your 20s and perhaps your entire life. Only buy things that bring you happiness. You will not be happy if you are constantly trying to outdo the Jones’s with bigger and more expensive purchases.
26. House Hack
Don’t be afraid to have a roommate in your 20’s. In fact, you should embrace it! A roommate can be your ticket to financial independence! There are many stories of young people who purchase houses and rent out each room to help cover the cost of their mortgage. My friend recently starting renting rooms in her home and now pays $500/month to live in the house that she owns! Since she is willing to have roommates, she can save a huge amount money every month. Her plan is to buy more property.
Is this the kind of thing you can do with your living situation?
27. Not Talking about Finances with Your Significant Other
Every relationship is different, but many relationship experts agree that couples should start talking about money pretty early on in their relationship. The talks don’t have to be very long, but they should help you stay on the same regarding finances. As you become more comfortable talking to your partner, consider setting up money dates. Some couples have money dates every week, month, or even every quarter. The point of a money date is to review recent spending and to make sure their financial goals still align. Think about what works best for your relationship.
I admit, it can still be hard to talk about money even in my own relationship, but I learned pretty early on that my partner’s views on money were pretty similar to mine. This helped put me at ease knowing that I am with someone who doesn’t mind investing money over buying expensive items.
28. Starting a Family without Money
Families can be expensive. However, some people say having a family is not as expensive as it may seem. I’ll be perfectly honest and admit that I don’t have any children. My family is my partner, me, and our bunny. I also feel that most people will never feel 100% financially ready to start a family. That being said, it doesn’t hurt to wait until you are free of consumer debt before you consider starting one. It’s a lot easier to buy groceries if you have the extra cash every month. There’s also less stress when involved when people are debt-free. Consider what works best for your situation.
29. Not Saving Money Every Month
Start saving money as early in your 20’s as possible. The more money you save and invest, the more your money will grow over time. While your friends are out buying lunch every day and purchasing expensive shoes, save that money instead. Perhaps one day you’ll have enough money to retire early and they will wonder how you did it!
30. Living Paycheck to Paycheck
If you find yourself living paycheck to paycheck in your 20s, there are 2 things you can do:
- Spend less money
- Make more money
Start tracking your expenses and budgeting your money so you don’t have to wait until your next paycheck to buy food or pay your bills! This is not the lifestyle I want you to ever live, let alone live in your 20s!
Money Mistakes to Avoid in Your 20s – Summary
I’ve talked about so many money mistakes to avoid in your 20s! I hope this list gives you some financial guidance to avoid some of the mistakes I made myself when I first left my family’s home. We aren’t taught very much about money growing up, so I really wanted to put this list together to help give you some direction about how to manage your money without going into a lot of debt or becoming stressed out about finances. If this helped you, please let me know! I would love to hear your feedback!