7 Money Mistakes to Avoid in Your 20’s

There’s no decade quite like your 20’s. You’re old enough to be a full adult, out on your own in the real world. Yet you’re still young enough to have your entire life ahead of you.

To put it shortly, it’s a decade of figuring yourself and your life out.

Part of this “figuring your life out” process is learning how to properly handle your finances. Many people in their 20’s have never had this level of responsibility before – juggling student loans, credit cards, bills, savings, investing, all while trying to hold down a job so you have an income.

With so much on your plate, it’s easy to fall into the endless financial traps presented to you when you first become responsible for your finances. Making these money mistakes in your 20’s can seriously set you back, though.

The choices you make in this decade will affect your finances for not just your 30’s, but even beyond that. Think of your 20’s like the foundation for the rest of your life: you spend the rest of your life building on top of what you laid down in your 20’s.

Motivational speech aside, here are some of the biggest money mistakes to avoid in your 20’s.

1.) Not Tracking/Budgeting Your Finances

Tracking your finances is critical to determining where you stand financially, as well as how to take action to improve your financial standing. You might THINK you’re frugal and thrifty, but creating a budget and tracking your finances will reveal the truth.

Plus, your finances are only going to get more complicated as you get older. Children, houses, cars, insurance, investments, you get it. Learning to budget now, when you have more time and less financial responsibility, will pay off far down the line when you’re a money-savvy homeowner and parent of 2.

2.) Racking up Credit Card Debt

Finally, you’re making a big boy/big girl paycheck. Alas, that paycheck is not enough to buy that thing you’ve been eyeing for weeks.

But that plastic card in your wallet whispers to you, begging you to swipe it and make the purchase. “Oh, I can just pay it back down the line!”.

This is how millions of people fall deep into credit card debt that takes years or even longer to dig out of.

No, it isn’t fun to watch your peers with seemingly more money go on lavish vacations or wear the hottest designer clothes. But think about this: how many of them are burying themselves in years of debt to look cool or have fun?

Keep your head down and stay focused. You won’t regret it when you’re debt free and stacking money when 30 rolls around.

3.) Failing to Build an Emergency Fund

When you’re young, you feel invincible. The world is your oyster!

But reality says otherwise.

Emergencies can happen to anyone at any time. Job loss, car accidents, hospitalization, family emergencies, etc. Keeping 3-6 months of expenses stashed away in an emergency fund is your key to avoiding thousands of dollars in debt should an unlikely tragedy strike.

In fact, make regular contributions to your emergency fund and include these in your budget. Only remove them from your budget when your account is fully funded.

As for where to put your fund, a high-yield savings account from a bank like Discover or CIT Bank will allow you to earn interest on your emergency fund while keeping it safely locked away.

4.) Not Saving For Retirement

Retirement is such a distant life event that saving for it 40+ years in advance doesn’t seem necessary. Most 20-somethings would rather spend their money now than sock it away to be used in half a century.

You need to do the opposite. The earlier you start saving for retirement, the more you can take advantage of interest. There are plenty of retirement calculators on the internet; run a theoretical retirement scenario and see for yourself.

The best time to start investing was yesterday, but the 2nd best time is this instant.

5.) Not Getting Renter’s Insurance

Let’s be honest: when you’re first thrust out into the world, you’ll spend most (if not all) of your 20’s renting various houses and apartments. Although you don’t own the place, your possessions are your responsibility; your landlord isn’t responsible for covering them.

Instead, you need to get renter’s insurance.

Renter’s insurance sounds like a waste of money at first, but if your place catches on fire or someone breaks in, you’ll be wishing you had taken out a policy.

Renter’s insurance is quite cheap anyways. The average renter’s insurance premium in the United States falls between $120 and $190 per year, or only $10 – $15.84 per month. That’s as much as a Netflix subscription, but to keep your belongings covered in case of disaster.

Now, many people in their 20’s have never had to take out an insurance policy before, so the whole process can seem daunting.

Fortunately, startups like Lemonade have recognized this and stepped in to provide extremely simple renter’s insurance policies.

Lemonade claims they can get you an affordable policy in as little as 90 seconds! Their policies start as low as $5 per month.

6.) Not Building and Keeping Track of Your Credit

Much of our economy operates on borrowing; credit score and credit history determine your ability to borrow, as these are both measure of your worthiness as a borrower.

A good credit score helps you

• Rent apartments – Credit score says a lot about financial habits. Many landlords ask for credit score as they want to see how likely you are to pay your rent in full and on time.
• Apply for loans/credit cards – The higher your score, the better the loans, credit cards, and other debt you have access to when you need it.
• Buy a house – Home buying requires an excellent credit score, because you’re borrowing six figures of money.
• Get a job – Employers in some industries run credit checks for certain jobs, as low credit score could imply bad financial habits, which in turn could imply financial distress. Financial distress means a higher chance you’ll defraud or embezzle from the company.

As you can see, many major life decisions involve your finances require a good credit score. Home buying is especially important to note because your score needs to be top-notch if you want your dream home.

With this in mind, you need to hone in on your credit as early as possible in your 20’s. The main way to do this is to pay every single bill in full and on time. Payment history and credit history length are two important factors in determining your score, so this alone will build your score significantly over time.

Keep your utilization low as well, preferably under 30% (make sure your total credit balance across all cards never exceeds 30% of your total credit limit across all cards). Try to use credit cards for necessities only – that’ll guarantee a low utilization, and you’ll earn some cashback.

On top of all that, avoid opening too much new credit at once – it’s tempting to nab all those signup bonuses and try to build your credit, but each new credit account you open triggers a hard inquiry (a formal check into your credit by the lender), which hits your score a bit.

Track your credit score at least monthly so you know where you stand. You get 1 free credit report from each of the 3 credit bureaus each year, but sites like Credit Karma let you check your score as many times as you want for free.

7.) Avoiding Taking Calculated Risks

While it’s true that your 20’s are the foundation on which you build the rest of your life, and although you should try to live frugally and be smart with your money, you shouldn’t sit around in your comfort zone and be safe.

See, your 20’s is the best time to take calculated risks as, barring certain exceptions (such as getting married young or taking care of ill parents), you’ll only gain more responsibilities as you get older.

Intelligent yet bold risks you should take include

• Moving to a new/bigger city – More job opportunities, a chance to “start anew” somewhere.
• Start a business – If it fails, you’re out some time and money, but you don’t have mouths to feed or large mortgage bills to pay yet.
• Focusing on education – Go for a college degree if you don’t have one, or an advanced degree if you do. Yes, debt is terrible; but the lesser of two evils would be to incur debt now for a bigger payoff later, rather than spend tons of money when you have tons of responsibility.
• Jump to a new job/career – Current job sucking the life out of you? Every second you wait to change your situation is less time to change to a job/career more in line with your interests.

Your 20’s is a time to try new things, fail, dust yourself off, and try again. Yes, failure hurts, but it hurts less when you can bounce back and give it another go.