7 Money Mistakes to Avoid in Your 20s

This post contains affiliate links. If you click, we may receive a commission at no cost to you.

4 min read
Broken Piggy Bank

Someone once told me “what you do in your 20s is what you’ll be in your 30s.” That resonated with me.

Your early to mid-20s are an interesting time. You’re no longer a broke college student, you’re more likely a slightly less broke working adult – haha. Generating any substantial net worth or savings seems nearly impossible as you can barely afford to pay all your bills. Student loans, rent, car payment, insurance, hitting the bars, eating out….you’re lucky if have a few hundred bucks left at the end of the month.

So, here are 7 money mistakes to avoid so you can set yourself up for financial freedom.

Mistake 1: Not Contributing Towards Retirement Savings

I made this money mistake when first graduated. Someone told me not to contribute to my 401K because my employer didn’t match. I shouldn’t have listened. They were older than me and I didn’t know much. That was in 2011. Luckily, I started maxing out my 401(k) as soon as I could afford it now accounts for nearly 90% of my net worth.

Savings for retirement should start as you can. Most employers make it easy to set up, but more difficult to access the money as the IRS tacks on a 10% penalty if you withdraw before age 59 1/2.

According to a recent analysis from Fidelity Investments of nearly 30 million 401k, 403b, and IRA accounts, there are nearly 600,000 with balances cracking seven figures. Quite impressive in my opinion.

For those who are new to the game, the most common retirement plans are:

401(k): Most for-profit companies sponsor this type of plan. It allows you to contribute pre-tax dollars to your account. The maximum contribution amoun for 2021 is $19,500.

403(b): Also called a tax-sheltered annuity or TSA plan. If you’re a teacher or work at a non-profit 501 (c) (3), then you most likely are offered this type of retirement plan. The maximum contribution amount for 2021 is $19,500.

IRA: Also known as an Individual Retirement Account. An IRA is a tax advantaged investment account. The most popular types of IRAs are Traditional IRAs and Roth IRAs.

Mistake 2: Not Having Roomates

Housing consumes roughly 31% of the average American’s income. If you are a young adult, you should definitely have at least 2 roommates. A 1 bedroom in Philadelphia, PA is roughly $1,672 in 2021 while the average 3 bedroom is roughly $2,588. Your rent is roughly half the cost when you have at least 2 roommates.

Electric, Heat, Internet, TV, and general household items are also sliced by a 3rd when you have 2 roommates. Those can add up to big savings.

Yes, you’re giving up the comfort of living alone, but if you can save $1,000 a month, it’s worth it in my book. After all, wouldn’t you want some friends to go to the bars with on the weekends?

Mistake 3: Going into Credit Card Debt

Avoid this money mistake at all costs. If you avoid Mistake 2, then you most likely can avoid going into credit card debt. The thing is with credit card is that it sneaks up on you. Most people don’t go into credit card debt buying making large, one-off purchases.

A little low on cash and you you’re meeting your friends for drinks? Throw it on your credit card

Going to a wedding a need a new outfit? Throw it on the Chase Freedom unlimited. 1.5% Cash Back after all, duh! $200 Cha-Ching

Credit card debt is the easiest way to lead yourself into financial ruin, the average interest rate on a credit card is 16.15% with many cards having rates well into the 20% + range.

Mistake 4: Buying or Leasing a Luxury Car

This literally makes me cringe.

Americans have learned to associated luxury cars with wealth. Yes, they look nice, Yes, you feel cool driving. No, it’s not financially wise to get one. Too many recent grads who make $60,000 – $80,000 are buying or leasing $400 a month 3 series BMWs that require $4K down.

Almost any new car nowadays comes with all the be bells and whistles. You can likely get a similar experience for a much lower price. Combine a luxury car with a 1 bedroom apartment on an entry-level salary and you’re as good as broke!

I bought a new-ish car when a graduated college, but it was a 1-year-old Toyota Corolla. I also was driving 120 miles each day for work and I didn’t want to break down in the middle of Delaware.

Mistake 5: Paying Bills Late or Missing Payments

Whether you simply forget to pay the bill or you were short of cash at the time. Not paying your bills or paying them late can cause financial problems later down the road. A missed payment can be reported to the Credit Bureaus (Experian, TransUnion, Equifax) only after 30 days. And, according to Experian, a late payment can stay on your report for up to 7 years!

If you have trouble paying your bills on time, do this:

  1. Set up autopay.
  2. Add a calendar reminder. I prefer the calendar reminder because my cash flow situation can fluctuate.

Think about that for a moment, just because you were lazy when you were 24 and didn’t pay a bill on time, that could cause you to have a higher interest rate on your mortgage when you’re in your 30s. Kind of crazy, right? Luckily, late payments have the largest impact when they first appear, but why even risk it?

Mistake 6: Frivolous or Excessive Spending

Round of Patron shots for the squad!

I’m buying a bottle at the club tonight!

I’m treating us to dinner!

I just got a $2,000 bonus, I’m going to buy that Louis Vuitton!

We all have friends like this or maybe that friend is you. Being generous and wanting nice things is not bad in itself. After all, money is a tool, not an end. However, if that spending is to your detriment e.g. you have other bills, expenses, no emergency fund, or you are not even contributing to your retirement account, then you need to seriously reconsider. Find a happy medium that works for you without spending you on the poor house. Instead of buying a new Louis Vuitton, you can buy a used one on the RealReal or Poshmark. I like nice things too, just not in excess.

Mistake 7: Not Having Proper Insurance

When you’re young, wild, and free, you don’t really think about insurance any most be think they’re invincible. This money mistake can end up catastrophic so, it’s important to be covered.

The types of Insurance I am referring to are:

Renter’s Insurance: Insurance that covers your property if, for example, there is a fire in your apartment building or a water pipe bursts. The price of replacing all your personal property could be quite expensive. Luckily, most renter’s insurance can be quite reasonable.

Depending on your policy, Renter’s Insurance can also cover things like:

  • Personal Property
  • Portable electronics e.g. your laptop
  • Personal Liability (in case someone gets hurt on your property and decides to take legal action)
  • Medical Payments to Others (Medical expenses if a guest or neighbor gets hurt your property)

I use a company called Lemonade. Their Renter’s Insurance starts at $5 a month. The price of an iced coffee. It’s a small price to pay for peace of mind.

Long Term Disability: This becomes useful if you cannot work for an extended period of time. After meeting the elimination period, your long-term disability coverage will kick in, and, in general, most policies will replace about 60% of your income.

Many employers offer long-term policies. If you are in your 20s, this may be the most affordable option. High-quality, private, long-term disability coverage can be quite expensive. Whether you have it through work or purchase it privately, this is a must-have for all working professionals.

Life Insurance: If you pass away, this type of insurance policy pays your beneficiary an amount as defined in your contract. The amount of coverage needed really depends on your financial situation. If you are single, no kids, with minimal financial obligations you may not need much. Not to be morbid, but, the cost of an average funeral can cost upwards of $12,000, so it may be helpful to carry a small policy even if you think you don’t need it.

I use Ladder Life. They allow you to increase or decrease your policy amount as needed.

The Bottom Line

If you can avoid these 7 money mistakes during your 20s, you’ll end up in great shape. However, everyone’s circumstances are always different and every situation can be unique. Noone is perfect, and don’t expect to be. With these guiding tips you can lead your financial life toward the path of least resistance.

What money mistakes did you make? Comment below and let me know!

Real World Investor


Adam is the founder of realworldpersonalfinance.com, an investing website dedicated to helping discerning individuals make the best investment decisions.

Before starting Real World Personal Finance, he was a Senior Vice President at one of the country's largest investment banks. He has over 10 years of experience working in financial services. His experience includes working with complex derivatives while spending many years working on a trading floor.

He has a bachelor's degree in Business Administration, majoring in finance.

Leave a Comment