Navigating the transformative decade of your twenties is truly an adventure. Our twenties pose many social, professional, and financial challenges. Whether you’re making your way through college, grinding through grad school, just starting your first job after college, or already gaining a few years of work experience, the choices you make can have a huge impact on your future wealth and financial security. In this post, we’ll explore the three biggest financial mistakes many individuals make in their 20s, and how you can avoid them

In previous discussions, we’ve revealed strategies for managing your finances during college, understanding the power of compound interest, and creating financial stability after graduation. Now, let’s connect all these insights together and explore three costly financial mistakes that young individuals often make.

Overspending and Living Beyond Your Means

For many people, their first job out of college is the first time they have a meaningful income. Having more money coming in combined with newfound independence and peer and societal influences can often lead to overspending. Your twenties are filled with new experiences and discoveries, and you often are trying to make new friends and discover new hobbies. Those are all extremely worthwhile to spend money on. However, when it comes to buying the newest tech every year and being sucked into consumerism, think twice before buying. When you want to buy something come back in a day or two and see if you still want it. And if you still do, see if you can afford to buy it twice outright. This will prevent you from both impulse buying and from going into credit card debit (which has an extremely high interest rate). As well, when it comes to eating out, we know it’s convenient and an easy way to socialize, but consider cooking at home an extra one or two meals a week or foregoing an appetizer or drink.

Overspending on luxuries and unnecessary things can quickly catch up to you. You’d be surprised to know that 38.7% of people making 100k a year or more are living paycheck to paycheck (PYMNTS report). Keep a budget in mind and remember to keep your expenses below your income each month, to the best of your ability. You can carry over the budgeting and financial knowledge skills we discussed in our post about managing your finances in college.

Not Saving and Investing for the Future

As we discussed in the last section, it’s easy to spend today and have fun, but this often makes us lose sight of the future. Even though you may not be able to save and invest much every month, not saving early can really set you back. It might seem inconsequential. You might question how big of impact waiting a few years can have. However, the power of compound interest cannot be overstated. The earlier you start, no matter how small, the more your money will grow in the long run. We dove deep into this topic in “Gen Z’s Path to Wealth: How Compound Interest Can Change Your Life.” To get started with saving and investing, first ask yourself if your quality of life would truly be impacted by saving an extra hundred or two hundred dollars a month. Every extra dollar you invest can go a long way.

One huge misconception that many people have is that saving for retirement is something that you only need to worry about when you’re old. The idea of saving for retirement might turn people off, since they want to live their lives to the fullest now, but this misconception can seriously hurt your future financial outlook. Once again, the longer you wait the more you have to save every month to achieve the same outcome. When you retire you need money to live on (obviously), and by pushing off retirement savings you’re only hurting yourself. There are also many tax benefits that come with investing in retirement accounts like IRAs and 401ks. We will discuss the various types of accounts in much greater detail in later posts.

Saving and investing doesn’t have to be solely for retirement though. In our twenties many people start to plan for life goals, such as buying a house or car, starting a family, or furthering your education. Saving is absolutely necessary to achieve these goals, and investing can make these goals much more achievable by allowing your money to grow.

Neglecting your Credit Score

Your credit score plays a crucial role in your financial life. You may think it means nothing, but it determines your eligibility for loans and the interest rate you can get. For car loans, if your credit score is bad you will likely not get a very good interest rate, which will cost you every month. If you intend to buy a house some day, most people need a mortgage, and if your credit score is bad you might not be able to get one or you might have a very high interest rate. A small difference in interest rate on a large loan like a mortgage can cost you tens of thousands of dollars. Even if you never intend to buy a house, many landlords ask for your credit score in determining if they want to rent their property to you.

The easiest way to build your credit score is simply to get a credit card with no annual fee, and pay off your balance in full every month. Credit cards will be discussed in depth in later posts, but they can be a double edged sword. Make sure you never pay the insanely high interest rates that come with credit cards by simply paying off your entire statement balance every month. You can set up autopay to make sure you never miss a payment. It takes time, many years, to build up your credit score, so getting started before you need to buy a house or a car is essential. Aim to get your credit score to 750 or above, and you will set yourself up well for the future.

Paving a solid financial path in your twenties

Your twenties are a pivotal time in your life, filled with excitement, opportunities, and of course, financial challenges. While it may be tempting to overlook the future implications of your financial decisions, every choice you make in this decade sets the stage for your financial future. Recognizing and avoiding these critical money mistakes in your twenties is a vital step toward a financially stable and prosperous future. Each smart choice you make today builds a foundation of security and wealth for tomorrow. Stay tuned for more insights and tips on mastering your finances during this dynamic phase of life.

Disclaimer: The content provided on this blog (Zooming to Fire) is for informational and educational purposes only. It represents the opinions and perspectives of the authors and should not be considered as financial advice. The authors are not licensed financial advisors, and no content on this blog should be in any way interpreted as professional financial counsel or advice. See more here.