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The 12 Biggest Financial Mistakes To Avoid in Your 20s

Written by
Samantha Rose
Samantha Rose is a personal finance writer covering financial literacy for OppU. Her work focuses on providing hands-on resources for high school and college-age students in addition to their parents and educators.
Read time: 12 min
Updated on October 24, 2023
young woman with her hair in a bun explaining the 12 biggest financial mistakes to avoid in your 20s
Mistakes happen. But these could cost you.

People who look back on their 20s can tell you that growing up is riddled with roadblocks and errors. They will also tell you this:

Most mistakes are avoidable — at least in hindsight.

Trial and error is a part of learning and growing. Missteps are natural. But when money is involved, it’s best to skip costly mistakes if you can. 

So arm yourself with knowledge. Be on the lookout. Here are 12 financial mistakes to watch for in your 20s and recommendations to avoid them.

No. 1: Never learning to budget

A lot of 20-somethings view budgeting as having enough money to make ends meet. This means not overdrawing their account, nights out, and on-time rent payments. As they grow older, they’ll realize that money needs to work hard. 

Where is your hard-earned money going? How are you planning for the future? 

If you can’t answer those questions, then it’s time for a reality check. A budget can help you do that. It will track needs and wants — highlighting the nonessential purchases you make every day. 

Start tracking how money is divided between bills, debts, and savings in order to plan for the future — and not just live in the present. 

How to avoid it

Create a budget by assessing your income and expenses. Income should surpass expenses — including paying off debt, contributing to savings, and investing in the future. If it doesn’t, then adjust your budget by slashing the nonessentials.

No. 2: Failing to set financial goals

Saving creates structure for our finances. It allows us to set and prioritize goals that will impact our short- and long-term financial success. Without financial goals, our dreams remain unfunded and out of reach.

Financial goals can either be short-term – like saving up an emergency fund or for a laptop — or long-term, like saving for a down payment or a retirement fund.

Pick a goal, any goal. The important part is to get started in order to turn your dreams into reality.

How to avoid it

Create a road map to set and achieve financial goals. Sort out expenses in order to put leftover funds toward a goal. Once one goal is reached, keep up the momentum and move on to the next.

No. 3: Relying on parents

Money can add tension to a relationship — even one between a parent and their adult child.

Coming up short when rent is due because you spent your paycheck on social activities isn’t only risky, it’s irresponsible. That’s not to say that having parents willing to help when you’re in financial trouble is a bad thing. In fact, it’s crucial to have a support system during hard times. Just don’t take advantage of anyone’s hospitality or purse strings.

Part of being an adult is becoming financially independent. Don’t assume your parent(s) will bail you out of a self-created money situation. The same can be said about other relationships, such as those with a friend or partner.

Preserve your relationships by taking money out of the equation.

Twenty-somethings should create a stable financial situation so they don’t need to borrow from others. If an unavoidable financial hardship occurs, ensure that borrowing money is a one-time or short-term request.

How to avoid it

End financial dependence. Start with independent living, regardless of where you live — prepare your own food, clean up your own mess, and do your own laundry. Transfer those skills to your financial habits. Create a budget, pay your own bills, and rely on savings during emergencies.

No. 4: Ignoring student loans

By ignoring student loans, 20-somethings risk damaging their credit. Reported late payments on student loans negatively impact a credit report. A ding on a credit report leads to a lower credit score — making it more difficult to receive the best interest rates in the future.

The easiest way to avoid this is by staying organized. Know the total cost of each loan, the monthly repayment amount, when it’s due, and how to submit payment.

Are loan payments too costly? There are several other ways to work with the federal government or a private lender before missing a payment. Consider an alternative repayment plan, consolidation, refinancing, or deferment.

How to avoid it

Before leaving school, create a plan of action to repay student loans. Determine if and for how long your loans qualify for a grace period. Once you start repayment, pay at least the minimum due, and make additional payments as your budget allows.

No. 5: Taking on credit card debt

Not all debts are created equal. In fact, maxed-out credit cards are one of the worst debt burdens to carry — due to interest and fees.

There’s a reason why credit card companies inundate young people with credit card offers. Twenty-somethings may be easily wooed by promises of low fees, introductory rates, and other perks.

Unfortunately, many are ill-equipped for the financial responsibility required to manage credit. Credit card debt is a cycle of high balances and minimum payments. Misuse of credit can tank your credit score and take years to fix.

How to avoid it

A good rule of thumb is to not use credit unless you can pay it off in full each month. Already have credit card debt racked up? Create an aggressive plan to pay it off asap.

No. 6: Spending more than you earn

It can be tempting to overspend on luxury items — like clothes, vacations, and electronics. When your paycheck doesn’t cover those nonessentials, it can force you to rely on high-interest options. Hello, debt!

A core financial literacy lesson is learning how to live within your means, no more spending above what you earn. Basically, income should cover expenses. If it doesn’t, then stop overspending and overhaul your budget.

How to avoid it

Spare yourself from debt by living within your means. Comparison shop, borrow, and limit new purchases. Above all, don’t purchase expensive items as a way to fill a void. Learning to be grateful for what you have can stop negative spending habits before they start.

No. 7: Not starting to save

Saving early matters. Many young people struggle to start saving because the future seems far off. 

In reality, the only way to secure a financial future is to save as early as possible. This is primarily due to the benefits of compound interest. Compound interest is interest earned on interest. It helps money grow, but only after several years. 

Setting money aside in an emergency fund will not only reap the benefits of compound interest, but create a safety net in case of unexpected expenses. 

Here are the types of unexpected costs that you should prepare for:

  • Unemployment
  • Medical, dental, or vision expenses
  • Car repair
  • Home repair
  • Electronics replacement
  • Taxes

If you don’t have money saved, you may eventually end up in serious financial trouble eventually. These unexpected costs are inevitable. It’s best to prepare and avoid a higher-cost alternative, such as using credit or taking out a loan for medical expenses.

How to avoid it

Put aside enough money to cover three to six months’ worth of expenses. An emergency fund is useful in the event of an unforeseen cost. Whether it’s an emergency fund or a traditional savings account — start with a small amount and gradually strengthen your safety net.

No. 8: Not contributing to a retirement account

Twenty-somethings who don’t fund either a company 401(k) or an IRA are mis\sing out

Remember, time is on your side. Contributing to a retirement fund in your 20s makes the most of compound interest. Contributions made early on will grow tremendously by the time you turn 66, the age to receive full retirement benefits.

Not only are 20-somethings missing out on the magic of compound interest, but they may be forgoing company money. That’s right. Many companies offer matching retirement contributions up to a certain percentage -- typically about 6%. Employees who choose to open a 401(k) and contribute a designated amount can receive a bonus contribution from their company. That’s free money! Over a lifetime it could mean having tens or even hundreds of thousands of extra dollars.

How to avoid it

Financial professionals recommend contributing at least 15% of your income into a retirement fund. If your employer offers a matching contribution, take advantage of the full benefit! 

No. 9: Forgoing insurance

Think there’s no point to insurance if you’re a healthy, responsible 20-something? Think again

Young people aren’t invincible. It’s important to learn that sooner rather than later — when you’re facing debt from a medical emergency or property damage.

There are all kinds of insurance to protect policyholders from financial losses. Your monthly contribution is combined and paid into a pool. If one person experiences adversity — injury, illness, property damage, or death — the pool covers their financial expenses.

Insurance should be purchased before it is needed. Remember, it's better to be safe than sorry. 

Without insurance, you may have to drain your savings or rely on high-interest credit to cover expenses.

How to avoid it

Set your insurance policies. Pay a small monthly cost instead of a larger bill should an emergency arise. Get covered on all fronts: health, dental, and vision insurance; renters or homeowners insurance; disability and life insurance; and anything else that applies.

No. 10: Living in a city that’s too expensive

Many twenty-somethings love big cities. Why wouldn’t they? Cities never sleep — they offer cultural events, vibrant nightlife, and a high-density area full of other young people. But all of that action comes at a cost. 

Cities are expensive. Just look at New York City or Los Angeles. The rent for a tiny apartment may cost a whole paycheck. 

Young people shouldn’t rule out life in a smaller city or even a suburb or rural area. Life in the big city can be a financial drain. Imagine if you spent that money elsewhere: paying off student loans, establishing an emergency fund, or building investments.

There are endless opportunities when your largest expense isn’t the city you live in.

How to avoid it

Before choosing a postgraduate location, compare the cost of living in several different places. Don’t rule out cheaper big cities and small towns. In fact, once you’re no longer a 20-something, you may appreciate a less expensive, small-town life.

No. 11: Buying a brand new car

Twenty-somethings are eager to cross off expected financial milestones — like purchasing their first car. In fact, they might do anything to justify the purchase of a brand new car. 

If your budget allows, then go for it. But most 20-somethings will sacrifice debt payments or building savings in order to finance a car. 

When life sinks in, they’ll realize that their shiny new model is equally as functional as the cheaper version without the upgrades and add-ons. 

A car purchase is a huge financial decision and it should be treated like one.

How to avoid it

Expensive new cars are rarely worth the return on investment. Consider a cheap, reliable, used car instead. Browse car dealerships, online car buying sites, and try word-of-mouth car sales.

No. 12: Pursuing an advanced degree without a plan

Higher education is a significant investment of time and money. Advanced degrees — beyond undergrad — don’t necessarily guarantee higher earnings or a better job.

That’s not to dissuade anyone from an advanced degree. Education is an achievement no matter what -- but it does require a frank conversation about career and salary expectations. Not to mention, the student loan debt it may generate.

How to avoid it

Young people considering pursuing higher education should answer a few important questions: Is there a demand for graduates of your intended degree program? Do the career and salary prospects align with your goals? If you can’t justify the degree, then consider alternative pathways.

Expert Advice from Ilyce Glink, CEO of Best Money Moves

Ilyce Glink, the CEO of Best Money Moves, is an award-winning columnist, radio talk show host, and the founder of four Chicago-based companies. Her latest company, Best Money Moves, is a financial wellness solution for companies to provide to their employees. 

She has observed young people make the same financial mistakes again and again. Glink shared her personal list of common mistakes and discussed the importance of establishing healthy habits. 

Top Mistakes to Avoid

No. 1: Getting advice from the internet

The first place many 20-somethings go to with questions is the internet. Often it works. But Glick warns young people to be careful. 

"There's a lot of bad advice that has great search engine optimization."

When Googling to find answers to your financial questions, be sure to vet the source. Look for trusted resources from government agencies and nonprofits.

No. 2: Not paying off debts in the optimal order

There are two strategies to repay debts: the avalanche and snowball method. 

The avalanche method targets high-interest debts first. The snowball method targets the smallest debts. Each comes with its own pros and cons.

"Paying off the highest-interest rate, nondeductible debt is usually best, but sometimes it pays to pay down a smaller loan so you can then throw a larger amount at the next one on the list."

Whichever debt repayment strategy you choose – make sure to stick with it.

No. 3: Not taking full advantage of employer benefits

Many 20-somethings are navigating employer benefits for the first time, retirement plans included. Glick advises young people to explore all their options.

"A 401(k) or other qualified tax-deferred retirement account is a great choice. But, so is a Roth 401k and a regular Roth IRA."

Retirement accounts typically differ by how the money contributed is taxed. Research other variables before making a decision.

Take advantage of employer benefits, especially when a match contribution is offered.

No. 4: Trading convenience for savings

There’s an app for everything – from food delivery to rideshares. But how much do modern conveniences really cost?

"Take-out is so easy. So is Uber and Lyft. But spending $100 on Uber and Lyft over a weekend, every weekend, adds up quickly."

Glink warns young people not to overindulge. Instead, budget your needs and wants. Savings are a need and should take priority. Wants are just a bonus. 

Once you’re aware of how much you’re spending, you may stop splurging on mindless conveniences.

No. 5: Not sacrificing short-term experiences for long-term gratification

Many twenty-somethings struggle with delayed gratification. Why live for the future when you can live in the present. Right? Wrong.

Young people are at risk of making impulse decisions, such as racking up debt on credit cards, Glink says.

"FOMO (fear of missing out) is pretty powerful, but sometimes you have to say no."

Spend within your means. If an item is out of budget, then don’t pull out a credit card. Your future self will thank you.

How to Navigate Your 20s and Come Out Ahead

Mistakes are inevitable. They’re part of growing up. To help young people find their way through the missteps, Glink stresses one simple strategy: goal setting.

“There's no time like the present to start planning for the life you want to lead,” she says. 

Start by setting short- and long-term goals. Once you have an idea of your goals, Glink suggests “reverse-engineering.” This means creating a plan to reach those goals based on where you stand today.

“If you don't have a plan, you simply won't get there because too many things will just get in the way,” she says. 

Her advice?

“Look around at the financial challenges your friends and families have faced and start thinking about how you would cope, financially and emotionally. If the answer is, 'not well,' you've got some planning to do.”

Bottom line

Twenty-somethings are faced with financial pitfalls every day. Avoid these common mistakes to build a healthy financial future.


Article contributors
Ilyce Glink

Ilyce Glink is a financial journalist, syndicated columnist, best-selling book author, and CEO of Best Money Moves, an award-winning financial wellness platform, powered by artificial intelligence, that helps employees measure and dial down financial stress.


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