The 3 Worst Financial Mistakes You Could Make In Your 20s

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Your 20s are your first full decade of adulthood. Keep reading to learn what not to do when you’re just getting started with managing your own finances. 

When you are in your 20s, you have your entire financial life ahead of you. You have the power of time, and ideally, since you’re just getting started with your career and independent life, you won’t have already made too many money decisions that you come to regret.

You’ll want to be careful during this decade though, so you can avoid making errors as you begin to make decisions about how to manage your personal finances. In particular, there are three big financial mistakes you should be sure to avoid in your 20s.

1. Waiting to start investing

One of the biggest mistakes you can make when you’re young is not putting money into an investment account to save for your future.

You should sign up with your company’s human resources department to participate in your workplace 401(k) plan if you have one. Or you should open and put money into an individual retirement account (IRA) with a brokerage firm (almost any discount online broker makes this process easy by just filling out an online application). These accounts provide tax advantages for retirement savings and give you access to the stock market. You can invest in index funds or mutual funds that track market performance so your money can start growing.

Waiting to start investing is a terrible mistake because you miss out on years of compound growth. That’s what happens when the returns you invest are reinvested and help your money grow very quickly. Missing out on this compound growth means you’d need to invest a whole lot more later on.

Say, for example, you want to end up with $1 million in your brokerage account by the age of 65. The table below shows how much more this would cost you if you wanted a decade to get started.

Delaying investing by a decade ends up costing you an extra $66,546 out of pocket to end up with your $1 million. And it makes it a lot harder to come up with the money you need each month. Don’t do that to yourself. Start investing in your 20s.

2. Going into lots of debt

Using credit cards or taking on other high interest debt to make purchases is another huge mistake. When you borrow, you make your purchases cost more due to the interest that you pay. You’ll also be committing your future self to paying for purchases you’re making today.

Try to avoid debt if at all possible, unless it is debt you’ve taken on to improve your life. This could be getting a mortgage loan to buy a home when you’re financially ready or taking out a loan to start a business. Unless you’ll be increasing your net worth and making yourself wealthier in the long run by borrowing, just say no to debt when you’re starting out.

3. Committing to large fixed expenses

Finally, you also want to avoid committing to large fixed expenses. These are the expenses that recur every month. If you rent an expensive apartment or buy an expensive car with a car loan, these would be examples of committing to big fixed expenses.

The more of your money taken by fixed expenses, the less there is left over for other things. It’s a lot easier to just choose a cheaper apartment to live in one time and free up money for investing than it is to live somewhere expensive and have to skimp on restaurant meals and entertainment every month.

Fortunately, these three mistakes are pretty easy to avoid. If you can manage not to make them, you’ll be setting yourself up for a much more secure future.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Christy Bieber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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