7 Biggest Money Mistakes To Avoid In Your 20s

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Cheers with Beers In Your 20s
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I was making small talk with someone earlier this month and we were talking about what age would be the perfect age if we could go back in time. I settled on the age of 25. What’s not to like about your 20s. For many of us, we’ve finally got done with school and started our first real job that’s not asking someone if they want fries with that. We are all bright-eyed and ready to take on the world and experience all that it has to offer.

This brings us to the topic of this post. If I could go back to my 20s, what would I say to myself as I grab my younger self by the shoulders and shake some sense (or maybe cents) into me. I’m sure for many of us, if we had known then what we know now we would be living a much richer life.

Here is my personal advice on the worst financial mistakes that I think 20-somethings should avoid making.

More: Biggest Financial Mistakes to Avoid In Your 30s

Avoid Massive Student Loan Debt

It used to be thought that if one didn’t know what they wanted to do in life, the recommendation was to go to college and maybe you’ll figure out what interests you after a couple of years of taking classes.

Studying At College Library
Photo Credit: kshelton

Now not so much. College costs have skyrocketed into the atmosphere. When I went to college about twenty years ago, the private university I went to was about $35,000 a year with room and board and all the other costs included. Today the total cost of a year at the university is almost $70,000.

Even in-state college costs a bundle. ValuePenguin found that the average cost of public college was about $25,290 for the 2017-2018 school year.

With the cost of tuition increasing faster than inflation – over 5% a year over the last 10 years, it is no surprise that the average student in the class of 2016 owes $37,172 in student loan debt.

Currently, 44.2 million Americans owe a total of $1.52 trillion in student loans and it is forecasted this figure will increase to $2 trillion by 2022.

With the median income of $31,099 in 2016, the average student when they graduate will owe more than what they will earn in an entire year of employment. This means instead of investing for one’s future, saving up to buy a home, or starting a family, their main priority will be figuring out how to pay off their crushing student debt.

In a survey of 61,000 people, One Wisconsin Institute found that the average length of time for them to repay their student loan debt was 21.1 years. Can you imagine not being free of your student loans until you are in your forties? Even worst is you can’t file bankruptcy and discharge your student loans. Students are the new modern-day debt slaves.

The high cost of a college education means that you will need to think long and hard about what type of career you want and whether it requires a college degree.

If the job you are interested in doesn’t require a degree, it might make sense to skip college and start working or go to a trade school. There are many well-paying jobs that don’t require a four-year degree – such as electricians, mechanics, plumbers, HVAC technicians, or dental hygienists. Walmart is hiring truck drivers at almost $90k a year.

If a job does require a college education, you need to ask yourself does it make sense to take out a ton of student loan debt to pay for it. You might be better off going to a local community college for the first two years of your college education, then transfer to a four-year university and save some money. The freshmen experience at college is basically taking core classes, gaining 15 pounds from all the pizzas eaten, learning how to do your own laundry without turning all your socks pink, going to parties, and staying up late.

If you decide to go to an expensive school, make sure you will be in a high-paying job once you graduate.

For students who plan to go on to graduate school, you don’t actually need a diploma from an expensive brand-name university to earn admission into a brand-name graduate school. What’s actually important is your grades and achievements you accomplished while an undergraduate. Check out the list of the undergraduate institutions represented at Harvard Business School and Harvard Law School.

For many of us we don’t even use our degree after we leave school. I know I don’t. I went to a private university with plans to go into med school. Instead, I flunked organic chemistry so I switched to computer science – at a liberal arts university. As you can imagine, the computer degree from there was pretty much useless. After I graduated, I started working on my online business full-time and was making six figures a couple of years later. I could have dropped out of college after a year of computer classes, got a three-year head start making money while saving a hundred thousand in tuition to boot.

When my mother suggested I should go get an MBA, I told her it wasn’t worth it since I won’t earn more money with a graduate degree while working for myself. It will actually cost me more than just tuition with the time spent studying and not on my business. I learned my lesson the first time around. For some people a degree and where they went to school is more for bragging rights and a source of pride.

Those who just want a 9 to 5 with a steady paycheck, where you went to school won’t matter once you’ve gotten your foot in the door. After ten or twenty years and working at several different employers, no one will care where you went to school. Your work experience and how good you are at your job will be a much more important factor.

Not Investing Your Money

The biggest benefit of being in your 20s is you have time. The biggest downside is you probably don’t have a lot of money. After all, there are a lot more important things to use the money for – like avocado toast. This causes many 20-somethings to put off saving for retirement or investing their money until later in life. This is a big mistake.

Planting and Growing Your Money
Photo Credit: TheDigitalWay

When you have over forty-five years till retirement, you are able to withstand any short-term fluctuations in the market. You will also have compound interest on your side. The money you invest earns you money. That money then earns even more money. And that money earns even more money on top of that. If you live long enough, you’ll end up with a trillion dollars.

Lets take for example if you started at $0 and invested $100 a month at an 8% annual rate of return.

If you started investing at 20 years old, using our compound interest calculator, by 65 you will have $483,669.

Now say you decided to spend that $100 a month on avocado toast instead and put off investing until you are 25. When you turn 65 you will have $324,180.

That 5 extra years and $6,000 turned into a difference of almost $159,500. That is a lot of money that you can use to buy all the avocado toast you want.

If you want to level up, take that money and put it into a Roth IRA account. Keep adding money each year, increasing it as your salary goes up until you max out at the $6,500 contribution limit for 2023. Resist the temptation to take that money out. By the time you hit retirement, you could have over $1 million tax-free.

Don’t make the mistake I made in my twenties where I kept the majority of my money as cash in a bank savings or investment money market account earning a pitiful amount in interest that didn’t even come close to covering inflation. You do this and you are actually losing money as things cost more over time.

A penny saved is not a penny earned. After a year, it’s closer to 98% of a penny. After 20 years, that penny going to be worth about 50% of a penny.

There is an opportunity cost of not investing, which as you can see from the above example probably cost me hundreds of thousands of dollars in the long run.

There is saving and there is investing. Saving does not equal investing. Saving is money you set aside for emergencies or plan to spend on something, whether that something is a house, car, vacation, clothes, or whatever. Money that you don’t have put away for a purpose should be making you more money. That is investing.

Living In A Luxury Apartment

You’ve just graduated from college and got your first job. Great! Maybe you have some student loans or credit card bills to pay off for all those pizzas you ordered while up late at night cramming. You can get those debts paid down and an emergency fund built up simply by continuing to live like a college student.

This could mean living in some place without a doorman and concierge, having a roommate or two, moving back home with the parents, or finding some place cheaper like a studio.

Luxury Apartment With View
Photo Credit: jeanvdmeulen

Those are acceptable options because no one expects you to be balling in your twenties. Most of your peer group is probably in a similar financial situation so nobody will bat an eye because you are living with roommates or at your parents’. This is not the case when you are in your forties or fifties. Take advantage of this while you can.

The general consensus is you should not spend more than one-third of your gross paycheck on housing costs. You don’t want to get into a situation where you are working overtime and come home only to sleep so you can go back to work early the next day to pay for the apartment that you can’t enjoy.

I would rather be broke and never knew what it would be like to be rich than be rich and end up broke. The former wouldn’t know what I would have been missing. When you go from broke college student to your own apartment after living in the dorms, you’ll feel like you are moving up in the world. The opposite is true when you have to downgrade from a fancy place.

Take that money saved from the over-priced apartment and put it towards things that are important to you. This could mean using the money for traveling, hobbies, treating yourself to dinners out with friends, a new pair of shoes, paying off debt, or investing in yourself.

The lower your fixed monthly expenses, the more money you’ll have available for other things and emergencies. You won’t have to worry about working at a job you hate just to pay your bills. It’s easier to live beneath your means at the start than figuring out what things you can cut from your budget afterward.

Buying An Expensive Car

Vehicles are the number one wealth killer. The second the wheels leave the lot, a new car is worth less than what you paid. Each year that passes and every mile it is driven, the value of a car decreases even more. A fancy car will get you from point A to B the same as a basic car.

Ferrari F12 Berlinetta
Photo Credit: Toby_Parsons

The more expensive a car is, the higher the costs to maintain it. Your insurance will be higher. So will the service fees at the Audi, BMW, Cadillac, Ferrari, Lexus, or Mercedes dealership. Parts will be more expensive. Luxury cars will usually require premium fuel and synthetic oil.

The general rule of thumb is to keep the total monthly costs of a car, which includes principal, interest, and insurance at about 10% of your monthly gross income.

When I was 25 I spent $43k on a brand new Yukon Denali. I loved the car, but it guzzled gas at the rate of 15 mpg and my insurance company at the time charged me $2,400 a year in premiums for full coverage. The only upside of the whole thing was I kept that car for 12 years before it was totaled in a spectacular accident and I also wrote off about 85% of the sales price on my taxes for using it as a business vehicle. I also drove it about 4.5k miles a year, so the cost of gas wasn’t that much. Perks of working from home. But when the car was totaled, the insurance company gave me $12k for it, for a loss of $31k in depreciation. It could have been worst. I could have paid MSRP, which was over $53k. Yikes.

More: Why You Should Never Buy a Car Based on the Monthly Payment

Unless you are in sales where the type of car you drive helps bring in more business, or if you lucky enough to be able to write it off as a business deduction, an expensive car will only keep you broke. This is especially true if you are the type of person who insists on buying a new car every time you finish paying it off.

If you are a guy looking to impress, an expensive sports car mostly attracts attention from other guys. Women drawn to you because you drive an expensive car may well likely be interested in your wallet more than you. But hey, if that’s ok with you, then buy whatever you want.

Daily Starbucks Habit

As if millennials being obsessed with spending obscene amounts of money on avocado toasts was bad enough, how about all that money people spend on $5 lattes every day?

Coffee and Work
Photo Credit: Engin_Akyurt

By buying a 25 lb can of coffee grinds from Costco and making their own coffee at home in the microwave for 5 cents a cup, after 30 years someone can have enough money to buy their own island in the Caribbean.

Just kidding.

If the daily pumpkin spice frappuccino makes you happy and keeps you from passing out at your desk and getting fired, then get the coffee. The whole point of money is to spend it on things that you love.

You shouldn’t have to live like a monk and not be able to enjoy the little things. Be frugal, not cheap. Focus on the big wins. There is only so much you can cut out from your spending. But your earnings potential has an unlimited upside. Invest early and consistently. Figure out how to make more money, whether that is asking for more responsibilities at work and getting a promotion or starting a business on the side.

Now the real next biggest mistake of your 20s…

Not Building A Credit History

Avoiding credit and not building up a credit history will cost you real money later in life.

Use Credit Card
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Your credit history and credit score is used in everything nowadays. Whether that is buying a car, buying a house, getting a business loan, renting an apartment, or basically anything that requires a credit check.

I’ve seen people who instead of being able to get a low interest or zero-interest loan to buy a car, the only thing they can qualify for is a subprime auto loan with interest in the teens. That is how you end up paying thousands of dollars extra over time for a clunker or end up owing more than the car is worth.

Your credit is important should you ever decide to get a mortgage and buy a house. One extra percentage point in interest on a 30 year mortgage will cost you tens of thousands extra dollars in interest over the course of the loan.

Even your car insurance rate is determined by your credit history. Many car insurance companies use credit-based insurance scores to determine risk. Research shows that people with lower credit scores are more likely to have higher insurance losses and claims.

So many people hear stories from their parents, friends, and teachers about how credit cards are evil and they should be avoided. They are told that people who use credit cards are spending money they don’t have and are therefore irresponsible and living above their means.

There are actually many reasons why credit cards are better than debit cards.

There is nothing wrong with having a credit card when used responsibly. Don’t go out and buy a $3,000 TV with it so you can watch the Super Bowl. Treat it like a debit card or cash and pay it off every month. If you can’t afford to pay for something outright, then you can’t afford it and you probably shouldn’t buy it. You don’t need to carry a balance or pay interest to earn a good credit score. You just need to show lenders you can pay your bills on time.

Read more: The 5 factors that affect your credit score

One of the ways someone who has no credit history can get started is to go to the bank or credit union and get a secured credit card. This is where you put down a deposit of a few hundred dollars as collateral and that deposit becomes your credit limit. Put small charges every month on the card and pay it off in full.

By building a good credit history now in your early twenties, your thirties self will thank you for it.

Not Having Health Insurance

If you haven’t been paying attention, the Affordable Care Act’s healthcare mandate was discontinued in 2019. That means there is no penalty for going without health insurance.

Since you aren’t required to have health insurance by the government, you don’t need it any more and can save some money right?

Get Health Insurance
Photo Credit: Free-Photos


We all know being in your 20s, we feel we are pretty much invincible. You might rarely get sick or don’t have any health problems. The health insurance companies expect this, and rates when you are younger are less for those reasons.

It’s better that you have at least some basic level of health coverage. If you missed the ACA enrollment period or didn’t want to pay premiums for all the coverages that you don’t need, you can still sign up for a short-term health plan if your employer doesn’t offer health insurance or if you are self-employed.

Medical debt is the number one reason for personal bankruptcies in the US. This is why you need health insurance. You are one slip and fall or car accident from financial disaster.

Insurance is there to protect you from the unexpected. I’ve had a friend get rear-ended twice in her car last year. A family member was diagnosed with cancer and the bill for six weeks of radiation if she didn’t have insurance would have been over $70,000.

In most cases, the insurance companies’ negotiated costs will be cheaper than paying with cash. One person I met who had chronic pain found that local pain doctors were charging $400 for a new patient appointment. One commercial insurance on the ACA exchange’s negotiated rate? $150, which is what you’d pay if you haven’t met your deductible.

Get a catastrophic plan with a high deductible if you need to save money.

Not Learning How To Budget

The last mistake people in their 20s make is not keeping a budget or tracking their finances.

Not Budgeting Is Like Burning Money
Photo Credit: Intellectual

Some 78% of Americans are living paycheck to paycheck. By not keeping track of your spending, it is easy to get to the end of the month and suddenly find you have no money left and no idea where it went to.

One of the worst things that happens is you sign up for a bunch of recurring monthly expenses all billed directly to your bank account or credit/debit card. I’m talking about that Netflix, Hulu, Spotify, or Pandora subscription, along with cable tv service, internet service, gym memberships, cell phone service, and more.

If you don’t keep track of your expenses, you may well be paying for a service that you no longer use. I’ve read a post about someone whose father was still paying for AOL dialup service up to a couple years ago. Dialup! I don’t know about you, but I don’t even have a home phone line anymore and haven’t for over a decade.

Every few years services will raise their monthly fees, like how Netflix did recently. Or like how Comcast raised their monthly modem rental rates earlier this year. By not paying attention and keeping a budget, all you will know is you suddenly have less money available each month and you don’t know why you can’t make ends meet.

If you want to save money you need to know where your money goes. Some people will be shocked that all those small everyday expenses add up to a large amount over time.

You can track everything easily by signing up to Mint or Personal Capital.

You go to their site, sign up, and enter in all your info. They will automatically pull all your income and expenses and put them in an easy-to-read format, with your spending all categorized. You will know exactly where your money is going and where you can cut back. You will get alerts when bills are due so you don’t forget and end up paying late fees.

Closing $ense

Your twenties are the foundation for the rest of your life. You don’t have to skip having fun in your twenties to be responsible with your money. Make good financial choices now and they will pay off immensely when you are older.

What are some mistakes to avoid in your 20s? Are there mistakes I’ve missed that you’ve made or people you’ve known made?

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