5 Financial Mistakes to Avoid In Your 20s

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Our 20s are a time for discovery and making mistakes, but making these 5 financial mistakes might cost you more than you think. Here's how to avoid them!

Every so often, do you look back on your life and think, “Wow, how could I have been so stupid?!” Yeah, me too. We’re all guilty of making mistakes.

Sometimes, the worst mistakes we can make involve money. And most of us know that our 20s are regarded as a time to make plenty of mistakes (and learn from them early on).

That doesn’t mean you shouldn’t be aware of major financial mistakes to avoid in your 20s, though. While being young means having more time to recover from them, we’ll still be better off if we experience success in our 20s instead. The sooner we can build a strong financial foundation, the better!

Even though I’m now in my mid-20s, I remember turning 20 and knowing next to nothing about credit scores, student loan debt, how to use a credit card properly, or how to pay off debt effectively.

That’s why I wanted to review a few financial mistakes that can easily be avoided in your 20s.

For those of you out there who aren’t in your 20s, these could very well apply to you, too! 🙂

1) Don’t Buy a Brand New Car


This is one of the more popular financial mistakes recent college grads make. What better way to celebrate your first step into adulthood (or your first job) than buying a brand spanking new car?

You’ll be the envy of all your coworkers, you get to drive around in style, and you’ll impress your friends.

Or will you?

At my second job out of college, 10 out of the 15 people that worked in our office had new cars. Some were luxury brands, some weren’t, and most were leased.

I won’t lie – initially, I was a bit jealous. I had one of the oldest cars in the parking lot, and I felt a bit out of place.

One day, a discussion of car payments came up. I found out most of my coworkers were paying between $250-$450 per month (or more). They thought these were decent amounts.

After that, I was pretty happy driving around in my older car, as not having a car payment sounded a lot better to me.

Take the responsible approach when buying a car. Save up as much as possible, and buy a reliable used car. If you have to finance, make sure you can actually afford the payments! Don’t destroy your budget for something that just needs to get you from point A to point B.

It’s been said before, but it bears repeating: new cars lose a lot of their value as soon as you put your foot on the accelerator. Don’t buy into the hype.

2) Don’t Rush Into Home Ownership


With the low interest rates that have been hanging around for the past few years, many of my friends and coworkers have been talking about buying a home, and in some cases, they’ve followed through on it.

That’s fine, so long as you know it’s the right decision for you.

Don’t go into the process blindly, though. You should have something saved up (preferably 20 percent of the purchase price of the home), and you should know exactly how much you can afford. (Hint: it’s probably not as much as what the banks will approve you for.)

Home ownership isn’t something you should rush into. While owning a home sounds nice (you won’t have to deal with lousy neighbors or property managers who couldn’t care less about their tenants), carefully consider all the hidden costs that come along with it.

Renting provides more flexibility, which can be great to have in your 20s if you want to move around for career opportunities.

3) Don’t Wait Forever to Pay Off Debt


As widespread as debt is, that doesn’t mean it’s normal to have it, or that it’s good to carry so many balances.

If you’re in any kind of debt, you should analyze your situation and figure out how to get it paid off, especially if you have consumer debt at interest rates over 15 percent.

Why should you attack debt? High interest rates will cost you dearly, and debt is usually a chain that will tie to you your paycheck. Most people in their 20s value flexibility, but debt gives you the exact opposite.

When you pay on credit and don’t actually have the money for the purchase, you’re paying more than the item originally cost. It’s a silly mistake that can be avoided with proper planning and budgeting.

4) Don’t Procrastinate on Saving for Retirement


If your employer offers a 401(k), please take advantage of it. Your future self will thank you for it. This is especially true if they offer matching contributions. That’s free money, and I don’t think most people in their 20s understand that.

If you’re unsure of how your 401(k) works (or if you even have one), just ask. It’s one of the most important keys to saving for retirement, and you should know how it works.

If you don’t have a 401(k) available to you (sadly, I didn’t!), look into opening an IRA. The annual contribution limit is $5,500. Broken up over 12 months, you’d need to contribute $458 per month to max it out. That’s not accounting for any windfalls you might get, either (bonuses, birthday/holiday money, tax refund, etc.).

If you’re in a decent financial situation, then it’s smart to start investing early, as compound interest is on your side. If you’re not sure where to open an IRA, check out John’s list of online brokerages as you can find a good one there.

5) Don’t Give Into Lifestyle Inflation Without Thinking


Most of the time, lifestyle inflation is inevitable. Let’s be honest, living like a broke college student for the rest of your life probably doesn’t sound too appealing.

But that doesn’t mean you should accept lifestyle inflation without a challenge.

This is how I think of it: when we choose to “upgrade” in life and incur an extra monthly or annual payment, we’re making retirement more expensive.

If we get used to a certain lifestyle now, we’re not going to be very happy about giving it up later, even if we can’t afford it.

Saving can be a challenge for some people, and by avoiding lifestyle inflation now, you’ll make retirement less expensive and easier to reach.

This is even more important for millennials, as life expectancy is increasing. That means our retirement will likely be longer than that of previous generations. Unfortunately, that also means we’re going to need more money to cover that increased time period.

When contemplating bigger purchases, keep in mind how it will impact your finances in the future.


What common financial mistakes do you see people in their 20s making? What financial mistakes were you guilty of making in your 20s? What are you having to do now from a financial perspective that you wish you would have done earlier?

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Erin M. is a personal finance freelance writer passionate about helping others take control over their financial situation. She shares her thoughts on money on her blog Journey to Saving.


  • Thomas @ i need cash ASAP! says:

    This is great advice! I’ve made all of these mistakes!!! Lifestyle inflation was probably the worst for me. Wasted a lot of money on stuff I didn’t need and ended up getting rid of later for pennies on the dollar.

    • Erin says:

      It can be difficult to avoid. It’s hard to hold back when you get a nice raise and think you can afford so many things you had to pass up on before, but that’s why it’s important to figure your values out beforehand.

  • Kalie says:

    Great advice. On the car point, I would add don’t have a car loan at all. Whether the car is new or used, there’s no reason to have consumer debt when you should be paying of student debt, saving for a home (if you want one), and saving for retirement. We tried to keep living like we were in college in terms of expenses until we paid off our student debt, and it helped us get rid of the loans much more quickly.

    • Erin says:

      While I don’t like debt at all, I realize that for select people, getting a car loan may make sense for them (especially if they’re already debt free and can finance at super low rates). I didn’t want to get into the particular situations in the post. I’m all for paying cash when you can, but sometimes it’s not possible. If your car is unexpectedly totaled in an accident when you were planning on keeping it for years, and the insurance payout isn’t enough, it’s a rough place to be in. However, I of course agree that people shouldn’t get an unnecessary car loan if their current car is perfectly fine.

  • Clarisse @ Make Money Your Way says:

    These are all great tips Erin! Newly college grads really wanted to have a brand new car as a reward for completing their college years which is actually a big mistake.

  • Taylor Lee @ Engineer Cents says:

    Haha, I’m a millennial and often think of myself as money-savvy but every once and a while I wonder if I’m doing #2 by buying a house so early.

    Great post!

    • Erin says:

      Hey, if it’s the right decision for you and you’ve thought it through, there’s no reason to doubt yourself. Just make sure you know what you’re getting into!

  • Kathy says:

    When our son got his first job out of college, the first thing we told him was to sign up for their pension and 401k plan (the company offered both), He kept the same car he had throughout college and ept it for 6-7years beyond graduation. His biggest splurge was to get a 2 bedroom apt instead of 1, which he could easily afford on his salary, but after a year, he moved to a cheaper place. He had zero student loan debt and actually lived a pretty minimalist lifestyle so that within 2 months after graduation, he opened an investment account. We either had a real smart kid, or we did a great job raising him. Maybe both. 😉

    • Erin says:

      Sounds like you did a great job of raising him and educating him! I didn’t know anything about investing or saving for retirement before reading personal finance blogs. My parents told me nothing. If they had, I would have likely opened an IRA much sooner!

  • Fervent Finance says:

    I saw this title and was thinking “I know I’ll have one thing that wasn’t mentioned” but I really don’t! Great job covering the major ones. Another one could be don’t carry credit card balances but that falls in line with #5. I would also add if you have a larger income, and no debt, be cautious of the products people like financial advisers will throw at you that are fee-ridden such as whole-life insurance policies. Be your own CFO!

    • Erin says:

      Oh yes, that last one is big. You definitely need to know who you can trust with your money! And to be fair, I had a lot more to say (and more mistakes to mention), but I had gone on long enough already. =)

  • Debt Hater says:

    Woooo! Luckily I’ve managed to avoid all five of these so far. When I first started my job I was ignorant about #4, but after reading a lot of PF blogs and taking advice from an older co-worker to take advantage of company match I quickly adjusted my strategy. I’ve now been saving more than just the company match too.

    • Erin says:

      Awesome! I’d almost argue that #4 is one of the most important. It really pays to start saving early and taking advantage of those matching contributions (if you’re lucky enough to have them!).

  • Jayson @ Monster Piggy Bank says:

    Now at my 24, I am a fan of shopping getting nice clothes and shoes and I am paying my car loan. I don’t regret the shopping hobby but I do regret the car because I don’t like the feeling of being in debt and rushing to pay it off. And I realize just lately that I don’t need it so badly. For those in 20s, don’t be like me.

    • Erin says:

      Thanks for sharing what you’ve learned, Jayson. I’ve definitely been guilty of having a shopping habit before, but thankfully I realized I had too much stuff and it wasn’t worth it anymore.

  • Kayla @ Femme Frugality says:

    Great tips Erin! I made some of these mistakes, but not all of them. I am trying to fix the ones I can too, like getting out of debt ASAP. Luckily, I didn’t buy a brand new car and I didn’t delay saving for retirement. But I did buy too much house…

  • Rachel says:

    Being in my early 20s , thankfully I have only done two of these listed mistakes. However neither one I view as a mistake. There was a lot of thought and discussions with my husband before embarking on buying a house and a new car. It also included a lot of discussion and advice from people I highly respect financially.
    We bought a new car because we could get a decent interest rate, and because we were actually borrowing cars from family members because we did not own one. I have driven used cars in the past and was tired of some of the problems. Also my job requires a dependable car as I drive for work (with reimbursement). Also my husband and I were planning on starting a family and knew we needed a vehicle to accommodate our life. So buying new was a good idea for us. 6 months later I still don’t regret it. We plan to drive this vehicle for a long time. And I love driving a reliable vehicle, especially with baby on the way.
    It should also be noted we don’t live on 2 full time incomes, so we are confident in managing our bills with all of it.
    Buying a house was one of the best decisions we could have made as well. We live in a college town, rent is expensive, 30-40% above what our current housing costs are. Dogs add another chunk to rent. And to top it off, we are in a super easy to rent area if we move, with a good rental value.

    So buying a car and house in the 20s could be a bad idea for some, it’s important to consider that every situation is unique. And for someone who has no credit card debt or student loans, I am OK with a car payment and mortgage.

  • Erin says:

    Hi Rachel,

    Thanks for taking the time to explain your rationale behind your decisions. I’m sure others will find it helpful!

    As I said in the post, home ownership can be right for some people, and that’s fine. I only caution against rushing into home ownership blindly because it’s seen as a “natural” move to make in your mid-20s. Having a discussion with your significant other about buying, and running the numbers, is a great approach to take.

    One of my friends purchased a new car because he has an awful commute and needed something more reliable and fuel-efficient than his last beater. It made sense for him.

    In the end, I think there’s a right and wrong way to go about making such big decisions. Most people don’t think through the options like you did, and instead base their decisions on what their peers are doing, or what the media is telling them they should be doing. You took the responsible path and figured out what was right for your situation, and that’s exactly what I believe everyone should do!

  • Kalen Bruce @ MoneyMiniBlog says:

    #4 is a huge one. I know a married couple who always get a huge tax return (low income & lots of kids). I always try to get them to start an emergency fund and start investing for retirement. They say it’s a great idea, but don’t get around to doing it and a few months later, all the money is gone…every year now for the last few. It’s sad!

    • Erin says:

      Ah, that would drive me crazy! That’s why it’s so important to know exactly what you’re going to do with your tax refund before you get it. Procrastinating when it comes to your financial situation is the worst thing you can do.

  • Reece says:

    OK, I’m going to admit it: I’ve done every one of those things, and I’m 25!
    There’s a bit of justification, though. Yes, I bought a brand new car, but I got it tax free- one of the perks of my job. That meant that I sold it a year later for £1,000 more than I paid for it. I know, it’s the exception to the rule.
    When I sold the car, I bought my house. I regret nothing…all I’d ever wanted was a house.
    But then we get onto my retirement fund….I’ve only started that recently. And my debts should have been paid off sooner. And I’ve definitely been guilty of lifestyle inflation….argh!
    With all said and done, though, I’m happy with where I’m now at. Thanks for the really interesting article.

  • Ashlee @ Save Money, Dammit! says:

    Such wise points!

    With the sound advice of parents (and what might be a little bit of common sense plus a twinge of good luck and support), we’ve managed to avoid these all too common pitfalls! Lifestyle inflation is a biggie, but whenever we’ve gotten raises or bonuses, we tuck that away and pretend like we’re still living on our original (less) salaries.

    • Erin says:

      That’s great, Ashlee! Pretending like it never happened is one of the best ways to avoid lifestyle inflation.

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