Your 20s are full of learning experiences. This coming-of-age period is a time when most people get full-time jobs and live independently for the first time.
For many, this inevitably means making a series of financial mistakes. Some are minor and easy to recover from, while others can set the stage for poor financial health well into adulthood.
“These mistakes are common, but they can also be avoided with the right guidance and mindset,” said Leyder Murillo, founder and CEO of Wolfpack Wealth Management. “Encouraging young people to seek financial education, start saving early, and make informed decisions can put them on the path to long-term financial success.”
Knowledge is power, whether you’ve already made some financial mistakes or are trying to preemptively avoid them. Here’s a look at 14 common financial mistakes people make in their 20s.
Lack of budget
Many people start earning their first full-time paychecks in their 20s, which can be exciting. However, it’s easy to go crazy spending without a set budget.
“Many young people do not create or stick to a budget, which leads to overspending and insufficient savings,” Murillo said. “Budgeting is crucial to understanding where your money is going and ensuring you live within your means.”
Ignore emergency savings
Maybe you know that building an emergency fund is a good idea, but you haven’t taken many (if any) steps to achieve it. If so, he said not taking this crucial step would be a major oversight.
“Unexpected expenses can derail financial stability,” Murillo said. “It is essential to have three to six months of living expenses saved to protect against unforeseen events.”
Accumulate high interest debt
If you’ve fallen into credit card debt, you’re not alone. Murillo said this is a common mistake for people in their 20s.
“Young people often rely on credit cards without considering the high interest rates, resulting in substantial debt,” he said. “It is important to manage credit responsibly and prioritize paying high-interest debts.”
Delay retirement savings
It’s not uncommon for young adults to put off saving for retirement because they believe they have too much time to do so, Murillo said. However, this approach will not bear fruit.
“Starting early takes advantage of compound interest, which significantly improves retirement savings,” he said. “Even small contributions to a 401(k) or IRA can grow substantially over time.”
Misconception about Roth IRAs
“While Roth IRAs are excellent retirement savings vehicles, there is a misconception that they are always the best option,” Murillo said. “If young people don’t have access to a 401(k) plan, they could miss out on the immediate tax deductibility benefits that traditional IRAs offer.”
Therefore, he said, it’s crucial to balance contributions between your Roth IRA and other retirement accounts, depending on your particular tax situation.
Lack of financial education
“The general lack of financial knowledge leads to poor decision making,” Murillo said. “Investing time in learning about personal finance can empower young people to make informed decisions about saving, investing and managing money.”
Therefore, the more you learn, the better prepared you will be to manage your finances.
Spending on lifestyle inflation
As people begin to earn more money, it is not uncommon for them to improve their lifestyle, Murillo said.
“It’s tempting to spend more on luxury items and experiences, but this can impede long-term financial goals,” she said. “It is advisable to keep lifestyle inflation under control and prioritize savings and investment.”
Bypassing health insurance
Health insurance is expensive, but it is a necessity. Choosing to skip coverage to save money is a risky move, he said.
“Medical emergencies can lead to significant expenses and debt,” he said. “It is crucial to have adequate health coverage to protect against unexpected medical costs.”
Falling for get-rich-quick schemes
If a tactic to make quick money seems too good to be true, it probably is.
“The lure of quick wealth can lead to falling into scams or high-risk investments without understanding the risks involved,” Murillo said. “It is important to conduct thorough research and seek advice from reputable sources before investing.”
Forgetting to set financial goals
It can be difficult to grow your finances without a solid plan.
“Without clear financial objectives, it is difficult to create a roadmap to achieve financial stability and growth,” he said. “Setting short- and long-term financial goals provides direction and motivation to save and invest.”
Lose compound interest
Lack of knowledge or fear of risk often causes young people to avoid investing altogether, Murillo said.
“Starting investing early, even in small amounts, can build wealth over time,” he said. “It is beneficial to understand the basics of investing and take advantage of employer-sponsored plans or low-cost index funds.”
Jeremy Zuke, a financial planner at Abundo, agreed that it’s imperative to start investing your money at a young age.
“Any financial calculator will confirm this: the sooner you start investing, the better,” he said. “Filling that Roth IRA each year into a simple, low-cost index fund will be a wonderful gift to the ‘future you.’”
Buy cash value life insurance
“This is almost always presented by a family member, friend or college classmate as a great way to invest and get life insurance,” Zuke said. “Unfortunately, it’s a terrible investment and insurance for most people.”
Basically, he said there are much better investments you can make with your money.
“The opportunity cost of the very high premiums that could have been invested can make the difference between retiring early or having difficulty retiring,” he said.
Invest little in themselves
Never forget that you are your greatest asset.
“This may be a bit counterintuitive, but by far a young person’s greatest financial asset is their human capital: the sum of all their future income,” Zuke said. “Investing in the continuous improvement of skills, knowledge and relationships that translates into earning potential is a better use of money than any other investment.”
Gambling instead of investing
“Social media aimed at Gen Z is full of stories about people who found success with an investment in stocks or cryptocurrencies, and new trading apps encourage active trading with rewards and gamification,” Zuke said. “This ends up being, by and large, a direct transfer of wealth from young, inexperienced investors to large institutions and other experienced investors.”
Instead of getting carried away with these schemes, choose more traditional investments that have been proven to provide future returns.
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