Your 20s are the perfect time to set financial goals and build your savings. However, individuals in their 20s are often inexperienced in managing their finances, so it's easy to make mistakes. Some of the most common mistakes involve ignoring your credit score, not building a budget, and living on credit cards.
These may lead to unfavorable consequences, making it crucial to learn healthy financial habits like reducing your expenses, forming actionable short- and long-term financial goals, and creating a financial plan. This guide explores 14 common financial errors and best practices that can help you achieve your financial goals in your 20s.
1. Putting off Saving for Retirement
A common financial mistake is to leave retirement savings to your 40s or late 30s. One of the best times to start an investment or retirement account is in your 20s. This should be a separate account, such as an employer-funded 401(k) or an individual retirement account (IRA). Saving early makes your retirement planning cost-effective and manageable over a longer period.
Creating a habit of putting away money for retirement allows you to take advantage of asset appreciation and compounding interest. This prevents saving from feeling like an inconvenience if you were to start saving later in life and requires you to save less to earn a higher balance. For example, when saving for retirement in your late 30s or early 40s, you may need to cut down on other expenses to save enough.
Add retirement savings to your monthly budget plan and contribute a certain amount toward your retirement account each month. If your employer offers a savings match, aim to save enough to maximize their contributions.
2. Not Building a Good Credit Score
In your late 20s and onward, you may want to apply for loans or mortgages. However, some people are unaware that you need to have a good credit score to access them. If you have no credit or a bad credit score, lending agencies and banks may turn down your requests to avoid the risks of not being paid back, affecting your future plans and goals.
It's important to get credit cards and store cards to build up a good credit score early. The longer you have a credit score established, the better your score will likely be. A higher credit score can make it easier to get loan approvals, access low interest rates, and receive higher credit limits. Some healthy financial habits for building good credit include:
- Paying bills on time and in full
- Applying for new credit cards only when necessary
- Keeping credit balances low
- Regularly monitoring your credit score
3. Not Knowing Your Credit Score
Knowing and understanding your credit score can help you keep your score on track with even the smallest changes. Your credit score determines your creditworthiness to financial institutions and banks. This makes it important to keep track of it and improve it over time.
For example, if your credit score were to dip due to a missed payment, you can quickly get your account back on track by paying above the minimum payment the following month. However, the missed payment may affect your credit report for months or even years, so it's best not to miss any payments.
This knowledge especially comes in handy when you plan to apply for a mortgage and want your credit score to be above a certain number. Here's how much different factors affect your credit score:
- Payment history: 35%
- Amounts owed and credit utilization: 30%
- Length of credit history: 15%
- New credit: 10%
- Types of credit: 10%
4. Not Budgeting Your Money
Establishing a clear budget is the key to achieving financial freedom. Avoid spending money on needs and wants without an organized plan. Overspending can harm your financial health. Instead, create an organized budget for different expenses to balance your income with monthly costs. Some valuable options are to use a budgeting app, automatic budgeting if your bank offers it, zero-based budgeting, or paying yourself first. Zero-based budgeting and paying yourself methods allocate every dollar and prioritize saving.
Another common method is the 50-30-20 rule. This rule recommends spending 50% of your income on needs, 30% on wants, and 20% toward saving each month. Needs may include expenses like utility bills, rent, groceries, and insurance. Wants include restaurant meals, subscriptions, vacations, and hobby supplies. Savings can include money put toward your emergency fund or retirement plan.
Try different budgeting methods until you find one that works for you. The best strategy is one you can stick with over time.
5. Not Saving for an Emergency Fund
Another common financial error is not keeping an emergency fund for unexpected costs. An emergency fund comes in handy for sudden events, such as a car accident, a refrigerator breaking down, or a family member's hospitalization. Not creating one may cause you to dig into other budgets or use credit to cover the cost, leading to financial instability.
Create a savings goal or limit for your emergency fund and monitor your progress. The amount you keep in the emergency fund is up to you, but experts generally recommend enough to cover between four and six months' worth of expenses.
6. Careless Spending
While it may seem like small purchases might not impact your finances much, the balance of your unplanned finances may rack up a large bill at the end of the month. Costs for extra snacks at the grocery store, food delivery, or haircuts may cause you to overspend. This habit either eats into your savings or causes unnecessary and inconsistent spending. The effects are even greater when you make unnecessarily big credit card purchases that lead to higher interest payments.
Try to avoid temptation and work toward more consistent spending. Otherwise, it's essential to add those items to your budget or look for cheaper alternatives. Spending $5 or $10 several times is the same as spending $50 once. Planning for purchases and ensuring you can afford them is key to avoiding careless spending.
7. Starting a Family Without a Financial Plan
When getting married and starting a family, you need to have a financial plan in place and know what to expect when taking care of a family financially. Having children or adopting a child requires considerations about insurance, health care, extra food expenses, toys, and diapers.
One New York child care affordability study shows that the average cost of caring for toddlers and infants in family-based care was $18,200 in 2024. How much it will cost for your particular family will depend on your state, region, and income. When this time comes, adjust your budget to accommodate these new costs. It also helps to build up your savings to allow for more flexibility for new and unforeseen child care costs.
8. Relying Too Much on Credit Cards
Credit cards are easy to use and can be useful for even the smallest daily purchases. Some purchases might include restaurant meals, cafe beverages, or a fill-up at the gas station. Excessive purchases may lead to debt, interest charges, or a poor credit score. If you use a credit card, pay off the purchase amount as soon as you can.
You could also train yourself to make purchases only occasionally by drawing cash for these instances instead, especially if the purchase is small. This may help you avoid buying more than you can afford. You can try using a debit card instead of a credit card. Because these purchases come straight from your bank account for money, you might avoid purchasing multiple items with credit. Still, try to use your debit card less since multiple charges quickly add up and may lead to an overdraft.
9. Not Setting Financial Goals
Avoid making financial sacrifices without setting a goal. Without a goal, it's easy to fall out of good financial habits because you're not working toward a particular end goal. This can impact your long-term savings and cause you to overspend.
Set a specific and measurable goal for your future that is specific to your needs and desires. Take some time to sit down and write out your goals. Create an actionable plan to achieve the goal within a realistic period. For example, if you're starting a family, your goal might be to save a particular amount of money by a set date. The actionable plan might include cutting down on restaurant meals and subscriptions to put money toward this savings plan.
10. Avoiding Financial Discussions With Significant Others
Discussing finances with your partner is critical to assessing your compatibility regarding long-term financial planning and goals. What if you're conservative with your finances while your significant other is an impulsive spender? If you and your partner move in together without discussing financial priorities first, money can strain the relationship during a time that was meant to be exciting.
Before getting to this stage of your relationship, discuss finances and what you both would like your financial goals and future to look like. Consider good financial habits you can both incorporate to improve your joint financial responsibility. These might include minimizing unnecessary spending, developing a budget, and saving for an emergency fund. Address where one or the other can compromise so both parties are happy with the financial plan.
11. Not Dealing With Debt
One of the biggest mistakes you can make is to avoid your debt and ignore phone calls from collectors. Ignoring your debt will only cause it to grow and may even result in fines and penalties. Start by understanding the difference between good debt and bad debt.
Good debts are those in which the benefits outweigh the cost of the debt. These might include investing in an education loan, borrowing to build a successful business, or getting a mortgage that will eventually allow you to own the property. Bad debt represents higher-cost debt with higher interest rates and few financial benefits. Some examples include credit card balances with interest and overdraft fees.
Understanding the differences should help you spend your money more responsibly in the future. Create a plan for managing your debt to save on interest payments.
12. Not Taking Calculated Risks
Young individuals sometimes avoid making calculated risks about investments and loans for small businesses because they're cautious of potential issues. However, calculated risks create a healthy experience that prepares you for future challenges.
Investing money in the stock market and taking out a loan to start a small business can bring great sources of income for yourself and your family when you make careful decisions. To improve your chances of success, carefully weigh the risks and benefits and thoroughly research the industry or stock market before taking action. Taking calculated risks can allow you to earn and save more money.
13. Not Earning Money in Your Free Time
Have you considered earning money for your hobbies? Creating a side hustle can be a great opportunity to earn money for something you enjoy doing. Whether you enjoy baking, crocheting, or working on building projects, seize the opportunity to sell those items on the weekends. This provides you with extra cash toward your savings with little time taken out of your week to sell them.
Diversifying your income sources can also help you if your situation changes unexpectedly. For example, if you were to leave your job, you'd have the money from your side hustle as a financial cushion while you look for another position.
14. Spending More Than You Make
Avoid spending your money as soon as you receive your paycheck. Doing so can lead to financial insecurity, especially if you spend more than you make. One common sign that you're spending more than you can afford is when you go into debt to make ends meet.
Look at your finances and find opportunities to cut back on spending. For example, you might switch to more affordable product brands and use the saved amount to pay essential bills. Writing down all your expenses will help you see where most of your money is going.
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