10 Money Mistakes to Avoid in Your 20s
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Most people aren’t taught about money, and instead, learn how to manage their finances through trial and error. Unfortunately, this approach creates a lot of problems for some people, and they end up making a bunch of money mistakes, especially in their 20s.
The good news, though, is that you don’t have to follow in their footsteps. Here’s a look at 10 money mistakes to avoid in your 20s, which can spare you a lot of pain…and years of financial recovery.
1. Deferring student loan repayment
One of my biggest money mistakes was deferring repayment of my student loan by several years. And not because I had to, but rather because I didn’t want to deal with the payment.
However, for every month and year that I did not make a payment, interest accumulated. So by the time I started making payments, I owed thousands more than my original balance.
Now, provisions like deferment and forbearance are there for a purpose. If you can’t afford your payment, they keep your account in good standing until you’re in a better place financially.
But it’s so important that you only use these provisions if you have to. In other words, if you can afford to start making student loan payments shortly after finishing school, definitely consider this. You’re able to build the payment into your budget before taking on additional expenses. Plus, the sooner you knock out the debt, the sooner you can move on.
2. No health insurance
I recently read that young adults have the highest uninsured rate of any age group, and within this group it’s the highest among those age 26 and 27. This is likely because coverage under a parent’s plan ends at age 26.
The reason for young adults not having health insurance is pretty obvious. The cost can be very high, even with an employer picking up some of the tab. So if you’re relatively healthy, you might reason that you don’t need it.
But health insurance is something you can’t afford to be without because it only takes one medical emergency or illness to bankrupt you.
And I know what you’re thinking: ”I don’t have what I don’t have,”and I completely understand.
However, you should still look into your options.
If you’re in school you might be eligible for a student health plan. Additionally, there are federal and state programs if you’re low income, as well as catastrophic health plans that protect against worst-case scenarios.
My point is, don’t assume that coverage is unaffordable. Explore different plans to see if one fits your budget.
3. Moving out too soon
This might hit a nerve with some people, and I completely understand the need for independence. But in all honesty, if you’re comfortable living with your parents after finishing school or after getting a job, consider this option too.
I highly recommend using this time to build a solid financial foundation. Because once you’re on your own and take on more expenses, it becomes harder to hit financial goals – not impossible, but harder.
What your parents charge for rent might be far less than what you’d pay on your own. This equals more disposable cash to build a fully-funded emergency fund, or you can tackle student debt or start investing.
Now, if you absolutely have to move out – and there’s no convincing you otherwise – look for a roommate so that you’re not carrying the load yourself.
4. Not discussing money with a significant other
I understand that some people grew up in homes where talking about money was taboo, or their parents were secretive about finances. Now that you’re an adult, you have to shift your mindset and shake this habit – especially if you’re managing finances with another person.
Money remains one of the biggest issues that couples argue about. And often times, these arguments occur due to poor communication, wrong expectations, and different money personalities.
So it’s crucial that you put aside all the “uncomfortableness” and have a real money talk before merging your finances with anyone.
These discussions not only reduce arguments, they also protect your finances. You’ll learn about their money habits before joining accounts.
5. Keeping up with friends
In 2018, Credit Karma conducted a survey and found that “39% of millennials admitted to overspending and even going into debt to keep up with their friends.”
Now, I’m not suggesting avoiding debt altogether. But it’s crucial that you understand the impact of debt because it can prevent you from living the life you want to live. And I’m talking beyond credit card debt.
Some people make the mistake (and this is not exclusive to young people) of buying too much house, to the point where they end up house poor.
Keep in mind, though, even if you’re able to make a monthly payment, high debt might prevent other things like saving money, vacations, or even investing. So keep your debt manageable and reasonable to your income.
Some people don’t realize until they’re in their late 30s, 40s, or even their 50s that bigger isn’t always better. If you learn this lesson in your 20s, you might have a much brighter financial future.
6. Not saving for retirement early
Thinking back to my 20s, saving for retirement was the farthest thing from my mind. I felt I had my entire life to worry about that.
Let me tell you, though, the time flies quickly. And if you don’t save early, before you realize it you’re a 35-year old playing catch up (don’t ask me how I know this).
So definitely start saving as soon as you’re able, whether it’s with an IRA or a 401(k).
Realize, too, that it’s okay to start small. So if you can only afford to save 3% of your income, start there and gradually increase you contributions.
7. Not understanding how to manage credit
Credit cards are a useful tool for building a credit history, but they are only useful when used responsibly.
Keep in mind that making your minimum payment does not mean that you’re using them responsibly. Yes, you get a gold star for making payments on time. However, responsible use involves so much more – such as not maxing out your cards.
When you have debt hanging over your head for years, you end up paying more in interest, and there’s the stress of worrying about the balance. Plus, your credit score takes a hit.
Payment history makes up a big part of your credit score – 35% to be exact. However, that’s not the only big contributing factor. Your credit utilization ratio makes up 30% of your score. So if you keep your balances maxed out or close to the card’s limit, your credit score isn’t going to be as high as it could.
It’s okay to use your credit card, as long as you pay off your balance in full every month. This involves only charging what you can afford.
8. Not learning how to cook
I’m not going to say “don’t eat out.” You can absolutely enjoy food outside the house and still be frugal and good with money
The key is moderation, though, because eating out is one of the fastest ways to break a budget.
Spending $15 a day is $105 a week, or $420 a month (per person). However, if you learn how to cook and prepare your own meals, you might only spend $25 to $50 a week per person (depending on how much you eat).
Even if you allow yourself two outside meals a week, you’ll probably still spend less than $420 a month.
9. No financial goals
Don’t sleep on the importance of setting goals. Money goals help you make good decisions with your finances. And without any type of direction, you might spend on anything because you don’t have a reason to save.
I recommend sitting down and thinking about where you want to be in the next 1 to 5 years.
Do you want to move out or buy a house? Would you like to relocate? Do you want to pay off debt? Do you want to build an emergency fund?
It doesn’t matter the goal, just make sure you’re working toward something
10. Forgetting to budget
Budgeting is personal finance 101, and I know some will say this is too obvious – but it needs to be said.
As soon as you start earning money, it’s a must that you track what’s coming in and what’s going out to ensure you’re spending a reasonable amount on both your needs and wants.
Overspending in either category means you’ll have little left for savings and debt repayment. Plus, it’s in your best interest to start budgeting when you’re young. It becomes much harder to get into this routine when you’re older, especially after years of winging it.
I’ve spoken about the 50-30-20 budget rule in the past, where you spend no more than 50% of your after-tax income on needs, 30% on wants, and 20% on savings and debt payment.
You might consider this plan, or another variation based on your circumstances like a 60-30-10 split.