Money Mistakes to Avoid in Your 20s: Lessons Every Millennial and Gen Z Should Learn

Your 20s are a time of newfound independence, exploration, and self-discovery. But they’re also a critical period for establishing solid financial habits that can shape your financial future. The decisions you make now—good or bad—can have long-lasting consequences. Unfortunately, many people in their 20s make common money mistakes that could hinder their progress toward financial freedom.

In this blog, we’ll highlight some of the most common financial missteps and offer practical advice on how to avoid them, helping Millennials and Gen Z start their financial journey on the right foot.

1. Not Having a Budget

One of the most fundamental mistakes people make in their 20s is neglecting to create and stick to a budget. Without a clear understanding of where your money is going, it’s easy to overspend and fall into debt. A budget helps you track your income and expenses, prioritize savings, and avoid living paycheck to paycheck.

How to Fix It:

• Create a budget: Start by listing all your income sources and expenses. Divide them into categories like rent, utilities, groceries, entertainment, and savings.
• Use budgeting tools: Apps like Mint, YNAB (You Need a Budget), or even a simple spreadsheet can help you monitor and adjust your spending.
• Allocate funds for savings and debt: Aim to save at least 20% of your income and set aside a portion for debt repayment if applicable.

2. Ignoring an Emergency Fund

Many young adults skip building an emergency fund because they believe they have plenty of time to save later or that their income isn’t high enough to save yet. However, unexpected expenses like car repairs, medical bills, or even job loss can happen at any time, and without an emergency fund, you could be forced into debt.

How to Fix It:

• Set small goals: Aim to save at least $1,000 as a starter emergency fund, then work toward saving 3 to 6 months’ worth of living expenses.
• Automate your savings: Set up automatic transfers from your checking account to your emergency fund every month, even if it’s a small amount.

3. Racking Up Credit Card Debt

Credit cards can be both helpful and harmful, depending on how they’re used. The temptation to overspend and rely on credit can lead to high-interest debt that is difficult to pay off. Carrying credit card balances can also hurt your credit score, affecting your ability to secure loans or even rent an apartment in the future.

How to Fix It:

• Only charge what you can afford: Treat your credit card like cash—don’t spend more than you can pay off in full each month.
• Pay off balances: Avoid carrying balances by paying off your credit card bill in full each month to prevent accruing interest.
• Use rewards wisely: Take advantage of credit card rewards like cashback or travel points, but don’t let them tempt you into unnecessary spending.

4. Delaying Retirement Savings

When you’re young, retirement feels like a distant goal, but the earlier you start saving, the more time your money has to grow. Failing to contribute to retirement accounts in your 20s can leave you scrambling to save enough later in life. Compound interest is one of the greatest tools at your disposal, and starting early allows your money to multiply significantly over time.

How to Fix It:

• Open a retirement account: If your employer offers a 401(k) plan with a match, contribute enough to take full advantage of the match. If you don’t have access to a 401(k), consider opening an IRA (either traditional or Roth).
• Contribute regularly: Even if it’s a small amount, start contributing to your retirement account as early as possible. You can always increase your contributions over time.

5. Living Above Your Means

It’s tempting to upgrade your lifestyle once you start earning a paycheck—splurging on dining out, shopping, or a more expensive apartment. However, this can quickly lead to lifestyle inflation, where your expenses rise with your income, leaving little room for savings.

How to Fix It:

• Live below your means: Focus on maintaining a frugal lifestyle by cutting back on discretionary spending and keeping your fixed costs (like rent) manageable.
• Delay big purchases: If you don’t need something immediately, save for it instead of financing it. This will help you avoid debt and ensure you can afford it without straining your budget.

6. Not Building Credit

While too much debt is a problem, not having any credit history can be equally harmful. A good credit score is essential for securing loans, getting approved for rentals, and even obtaining lower interest rates. Without a credit history, lenders may view you as a higher risk, making it harder for you to qualify for loans in the future.

How to Fix It:

• Use credit responsibly: If you don’t have a credit card, consider getting one and using it for small purchases that you can pay off each month.
• Pay bills on time: Consistently paying bills (credit cards, loans, utilities) on time will build a positive credit history.
• Check your credit report: Regularly review your credit report to ensure there are no errors and to track your progress in building credit.

7. Not Setting Financial Goals

Without clear financial goals, it’s easy to fall into the trap of spending aimlessly. Whether it’s saving for a house, paying off student loans, or planning for retirement, having well-defined goals can help guide your financial decisions and keep you on track.

How to Fix It:

• Set short- and long-term goals: Identify what you want to achieve in the next year (short-term) and over the next 5 to 10 years (long-term).
• Create a plan: Break down your goals into actionable steps, such as saving a specific amount each month or paying down debt aggressively.
• Track your progress: Regularly check in on your goals and adjust your plan as needed.

8. Not Educating Yourself on Personal Finance

Financial literacy is key to making informed decisions about money. Many people in their 20s avoid learning about personal finance because they find it overwhelming or assume they’ll figure it out later. However, the sooner you understand how to manage your money, the better equipped you’ll be to build wealth and avoid costly mistakes.

How to Fix It:

• Read books or blogs on personal finance: There are countless resources available that can help you understand budgeting, investing, and saving.
• Listen to podcasts or take courses: Podcasts like “The Dave Ramsey Show” or “The Financial Independence Podcast” offer valuable advice, and online courses can teach you the fundamentals of managing money.
• Seek professional advice: If you’re unsure about how to proceed with your finances, consider consulting a financial advisor to help you create a personalized plan.

Conclusion

Your 20s are a prime time to set the foundation for your financial future. By avoiding these common mistakes and adopting healthy financial habits early on, you can pave the way for a stable and prosperous future. Whether it’s creating a budget, starting an emergency fund, or planning for retirement, the key is to start now and stay committed to your financial goals.