Updated on 01.25.15

10 Money Mistakes Most 20‑Somethings Make

buying a new car

Buying a new car may seem like a no-brainer. But when you’re still making monthly payments years later, you might end up wishing you could spend that money elsewhere. Photo: Joshua Chase

Your 20s are a time of self-discovery, a time to mature and grow. Many people reach several life milestones in their 20s: graduating from college, buying their first home, getting married, or starting a family.

But if you set aside all those exciting and momentous occasions, the best thing about your 20s might be this: You still have time. You can make mistakes — lots of ’em — and have plenty of time to recover and rebound like they never happened.

But what if you didn’t make those mistakes in the first place? Wouldn’t that be easier?

Here are 10 money mistakes that nearly every 20-something makes (and you should avoid):

No. 1: Not Contributing to Retirement Right Away

According to a recent Better Money Habits Millennial Report poll compiled by Bank of America, a staggering 53% of millennials are living paycheck to paycheck. Even worse, the survey showed less than half were saving in a 401(k) and only 16% had an IRA in 2014.

But let’s be real. Chances are, a lot of the young adults in that demographic simply can’t save for retirement. Maybe they’re still unemployed (workers age 25-34 clocked an unemployment rate of 10.5% as of October 2014), or maybe they’re saddled with too much student loan debt to save for anything, let alone retirement.

Still, it’s likely that at least some 20-somethings can afford to save for retirement, but aren’t. And as with most things, there will be consequences.

Your 20s are the best time to start saving for retirement for a number of reasons. Remember, time is still on your side, and that time can work in your favor when it comes to retirement savings — mainly due to the magic of compound interest.

And 20-somethings aren’t just missing out on their own retirement dollars if they don’t save; they may also be missing out on a company 401(k) match as well. Taking advantage of that essentially free money, in addition to compound interest, could mean having tens of thousands – or even hundreds of thousands – of dollars more for your retirement.

No. 2: Pursuing Higher Education Without a Plan

Pursuing an advanced degree seems like a good idea, but is it? According to the experts, it depends.

Unfortunately, many unemployed and underemployed college graduates pursue advanced degrees without taking the time to figure out the return on that investment. And in many cases, the return on investment, or ROI, is awful, to say the least, or even nonexistent.

Why? Because advanced degrees cost money and time, and aren’t always a guarantee of higher earnings – or even a job.

In other words, a master’s degree in women’s studies may sound like a boatload of fun, but it doesn’t mean it will help you do, well, anything.

According to Forbes, some of the best master’s degrees for jobs right now are in fields such as information technology, engineering, health care, and computer science. Meanwhile, some of the master’s degrees with the worst ROI are in fields such as library science, English, history, and political science.

That’s not to say an advanced degree in any of these fields will definitely be a good or bad investment, but anyone considering these options should do some research. Find out if there is a demand for the work you hope to do, and if not, consider changing your plans.

No. 3: Giving Up the Student Life Too Fast

For most people, college is a time of simple living — stacked four-deep in a tiny apartment, keeping odd hours, and scraping by on mac-and-cheese. And even though college life may seem like a struggle when you’re in the midst of it, ask any 30-something with a mortgage, car payment, and two mouths to feed if they miss those easy days of college, and they’ll likely say yes.

The truth is, college life is probably the easiest many have ever had it. Never again will life be so simple or so cheap. And while you might be tempted to trade up your Ikea lifestyle after landing your first real job, most college graduates would be better off if they kept living the frugal college life even after they graduate and start their career.

No. 4: Buying New Cars … and Thinking It Matters

According to USA Today, the average price of a new car surged to more than $30,000 in recent years. But when you’re a 20-something, you don’t really care. You might do or say nearly anything to justify the purchase, telling yourself things like, “Everyone has a car payment!” and “I can totally afford this,” all while not really having a clue what your life will be like in the future.

Then you’ll have kids and realize that nothing looks quite as cool with two carseats and some window shades in the back. And that $500 monthly payment? You’ll find you’d much rather have that money for diapers or formula or vacations or groceries. At a certain point, most people realize expensive new cars are essentially a waste of money and opt for cheap, get-the-job-done transportation instead.

No. 5: Voluntarily Diving Into Debt

When you’re 20-something, it’s easy to think of debt as a temporary hassle. A few dollars charged here and a hundred bucks charged there don’t seem like a big deal.

But eventually, those small purchases add up, and those credit card balances start to balloon. Throw a high interest rate in the mix and those balances could even become a hardship. Then, all of a sudden, you’re deep in debt, struggling to get by, and often have nothing to show for it.

It takes a while, but most people eventually realize how destructive debt can be. The monthly payments get tiresome, and not having those extra funds for other important expenses can get old fast.

When you’re young, you think of debt as a temporary hurdle, something you will overcome when you get that next raise or next bonus. But when you’re older, it’s easier to see just how quickly things can spiral out of control.

The bottom line: Staying out of debt in the first place is much easier than digging your way out after the fact.

No. 6: Not Killing Those Student Loans

According to the Project on Student Debt, seven in 10 college graduates in 2013 left school with more than $28,000 in student loan debt, the highest of any generation of college borrowers ever. And it’s only expected to get worse as the cost of college continues to surge.

With debt like that hanging over their heads, it’s easy to see why college graduates seek to defer their loans or even sign up for loan forgiveness programs that offer to zero out their balances if they agree to work in a certain industry for a specified amount of time.

But doesn’t that just push the buck further down the line? Wouldn’t it be better to kill those student loan debts before marriage, kids, and a monthly mortgage threaten to get in the way? Your 20-something self may not think so, but your 30-something self would likely disagree. Instead of procrastinating, 20-somethings should spend their early years paying off those student loan debts once and for all.

No. 7: Keeping Up With the Joneses

Your best friend graduated from college and immediately bought a starter castle, some Ugg boots, and an adorable Honda Fit. You’re totally jealous, but you’re also totally confused. How exactly can she afford that on her first salary out of college?

When you’re a 20-something, you see situations like this and sit back with envy. After all, you want your own starter castle and shearling-lined boots too, right? And who doesn’t want a shiny new car?

But the truth always comes out in the end. Eventually, you’ll probably see exactly how your friends lived an elaborate lifestyle right out of school. And most of the time, they did it by diving into major debt.

The point is, many of your “Joneses” can’t afford their lifestyle, but it won’t become obvious until they’ve been doing it for a while. So if you’re a 20-something and watching your friends live an outrageous lifestyle on a starter salary, just sit back and grab a bowl of popcorn – this may take a while.

No. 8: Staying in Dead-End Relationships

We all had that one boyfriend or girlfriend in college. The one who couldn’t balance her checkbook. The one who always came up short when the dinner bill came, or who never had money for the movies. You likely spent years with this person, hoping they would one day grow up and change — that they would eventually become responsible enough to pay their electric bill on time or not spend their rent money on a tattoo.

That kind of relationship is adorable in your 20s, but it will become deplorable in your 30s. And while some of those irresponsible souls can and do grow up, others never will.

It’s okay to date someone who might change, but it’s time to throw in the towel when you find someone who never will. The hard part? Knowing the difference.

No. 9: Insisting on Big-City Living You Can’t Afford

Twenty-somethings love to live in big, exciting cities with round-the-clock street fairs, cultural events, and action. They don’t mind paying $8 for a tub of Country Crock or a case of water because it’s totally worth it. They’re living the dream!

But that tiny, overpriced apartment will get old one of these days. And maybe, just maybe, you’ll wish you could have some of the money you spent on $13 martinis back. And perhaps you’ll find that your dreams change as you get older; while you once dreamed of the big-city life and all the glory that comes with it, you’ll find your new dream requires a house, a picket fence, and 2.5 kids.

Fortunately, the solution to this one is simple. Are you a 20-something who’s tired of living broke in the big city? It might be time to find a cheaper big city — they’re out there — or just move somewhere with green grass and low rents. Once you’re not a 20-something, you may even find that the suburbs aren’t so bad after all.

No. 10: Never Learning to Budget

To a lot of 20-somethings, budgeting means the same thing as not overdrawing their checking account. It means having enough money for happy hour at P.F. Chang’s and the electric bill, all while still having a half tank of gas to get there and back.

But when you get older (and wiser), you may realize you want more out of the money you work so hard to earn. You may look around and think, “Where is my money going?” and “What do I have to show for the 40 hours I’ve been slaving away every single week?”

That, my friends, may just be your defining moment. And let’s hope you’ll create a budget that actually tracks where your money is going. Because, like it or not, it’s hard to save when you have no idea what you’re spending your money on in the first place.

And once you’re out of the 20-something mindset, you will probably realize others quit solving your problems for you years ago, and discover the biggest lesson of all:

Once you’re a 20-something, you’re on your own.

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