Five Financial Mistakes People Make in Their 20s
When it comes to your twenties, many people feel like it's the best time of their lives: there’s new freedom, exciting adventures, shifting priorities, and maybe even some new fears.
You might start to notice all those responsibilities piling up, especially when it comes to managing money.
And it’s funny how such an essential topic is often overlooked in school; it’s something you have to learn on your own.
Especially in today’s economy, being smart with your money is as important as ever.
But here’s the thing, you’re still learning, and that’s okay!
To help you stay on top of your money, here are five financial mistakes to avoid… and don’t worry, this blog will help you understand how to dodge each.
Spending More Than You Make
Chasing a lifestyle you can't afford is one of the easiest financial blunders to make.
Constant impulse spending on luxury or expensive items to appear wealthy, whether through fancy clothes, jewelry, or extravagant dinners, has become extremely prevalent in this age of social media gratification.
However, these choices only provide temporary satisfaction and prevent you from building wealth or saving money that could help you in the future.
And this is a common mistake made by most people: overlooking their budget.
An easy way to do this is by scrutinising your expenses and habits to see what works best for you.
Incorporate the 50/30/20 budget rule into your plan
Set aside 50% of income for essential needs
Dedicate 30% of income to wants
Save 20% of income in savings
Without being aware of where your money is going, it's easy to spend irresponsibly.
What feels like an occasional expense may end up costing you significantly more in the long run.
So, start making a habit of budgeting now before it gets too late!
Remember, there’s a difference between being wealthy and being rich. You might make a lot of money, but if you’re spending it all on luxuries, you can never truly have freedom.
Mismanaging Debt
The second most common mistake made by young adults is handling debt.
Debt, especially once piled up, can be a troublesome situation to place yourself into. Plus, in this age, it has become easier than ever to rack up charges on your credit card without much consideration.
Oftentimes, people find themselves trapped in a cycle of debt, continuously spending and borrowing against their credit. For many, credit cards have become a lifeline, especially when cash is tight.
However, relying solely on credit cards can leave you without any emergency savings, nothing saved for retirement, and cause you to live from paycheck to paycheck.
The same goes for personal loans.
If you are a student, you can easily be lulled into a false sense of security, thinking that student loans or scholarships cover all your college expenses. But then there are still many out-of-pocket costs that can quickly add up if you’re not careful.
Eventually, these debts can spiral out of control, making it more difficult to keep up with payments. This often leads to late fees and high interest charges, which further compound your debt.
And life can also present unexpected challenges, whether you need a handyman to fix something in your home or face a medical emergency. Without proper savings, you may worsen your situation a lot more.
How to Break Free from Debt:
Now, if you do find yourself trapped in the cycle of debt, it's still possible to work your way out. Here are three ways people usually go about it:
Option 1: One approach is to start with the avalanche method. If you have multiple debts, focus first on targeting the one with the highest interest rate. What that means is to place as much money as you can on the account with the highest interest rate, with minimum payments to your debts with a lower interest rate. Once you pay off the account with the highest rate, move on to the second-highest interest rate account.
Option 2: Not for everyone, but some students may be eligible for student loan forgiveness, which releases borrowers from their obligation to repay part or all of their federal student loan debt. However, forgiveness is available for only some types of loans, and eligibility is limited to borrowers in certain educational or military professions.
Option 3: Another approach you can take is “debt consolidation”. With debt consolidation, you can pay off one or more debts with a new loan or credit card, while taking advantage of a lower interest rate. You can even combine multiple debts into one to simplify the process.
Not Saving For Retirement
With debt weighing on your finances, it’s easy to postpone saving for retirement till later. However, postponing it until "later" can cost you years of lost earnings due to compound interest and the many tax-saving strategies that could’ve benefited you.
Even saving the smallest amount can make a huge difference. Here’s how to do it…
Diversify Your Accounts
Let your money grow in separate accounts through an employer-funded 401(K), Roth IRA, or other investment accounts.
Employer-based accounts such as 401(k) and 403(b) plans allow you to lower your taxable income, reducing your tax burden for now. This can be extremely helpful if you want to avoid stressing over taxes now and focus more on other expenses, such as paying off debt.
However, it's important to note that having too much money in employer-based accounts (tax-deferred accounts) can potentially lead to unintended consequences.
As you approach retirement, you may lose many valuable deductions, such as mortgage interest, child tax credits, and others. With fewer deductions, a larger portion of your income becomes taxable. Thus, it's better to limit the amount you allocate to tax-deferred accounts.
Instead, consider dedicating most of your savings to a Roth IRA account. With a Roth IRA, your money grows tax-free, quietly and steadily, without the worry of taxes during your retirement years.
To learn the specifics of each retirement account, check out our latest blog on Retirement Planning for more information.
Roth IRA Conversions
The downside of a Roth IRA is its restrictions on who can contribute.
As of 2025, married couples can contribute only if their combined income is less than $236,000. If you are a single earner, you can contribute only if your income is under $150,000. Anyone with an income exceeding these limits cannot directly contribute to a Roth IRA.
But don’t let that discourage you; an alternative way to contribute to a Roth IRA is through a Backdoor Roth IRA.
With a backdoor Roth IRA, you first contribute after-tax dollars to a Traditional IRA and then convert that amount into a Roth IRA. You will also need to pay taxes on each dollar you convert into your Roth IRA.
However, be wary of how much you transfer at once.
If you convert too quickly, you might find yourself in a higher tax bracket.
If you convert too slowly, you may not complete the conversion before tax rates increase.
It is generally recommended that you do your Roth IRA conversion during the years when you are temporarily in a lower tax bracket. This strategy could help you pay less in taxes on the money you move from a Traditional IRA to a Roth IRA.
Once the money is in a Roth, it grows tax-free, and your withdrawals in retirement won’t be taxed.
Health Savings Accounts (HSAs)
You may also be familiar with health savings accounts (HSAs). An HSAs account comes with two benefits in one: it covers healthcare costs with pre-tax dollars, plus it can be used as a retirement savings plan.
You can use a Health Savings Account (HSAs) to pay for current medical expenses, but if you cover all these costs, it can also be used to save for retirement due to its triple tax-free benefits.
Most people contribute to an HSAs with after-tax dollars through payroll deductions at work, so they can get the advantage of a lower taxable income and no FICA taxes.
Even if you change jobs or retire, your HSAs funds will stay with you and continue to grow in your account, earning interest.
A good practice is to maximize your HSA account each year and cover current healthcare costs from other savings.
Ignoring The Stock Market
Investing may seem like an intimidating idea, especially when you are in your twenties, but it can be a great way to build wealth for your future.
Remember, time is the greatest ally of building wealth, and starting early may give you a far set of benefits.
Choose Companies That Pay Dividends
When you earn money from a job as a high-income earner, you are subject to regular income tax rates, which can be quite high. To truly build your wealth, you need to do more than simply rely on a good salary.
When you invest in companies that pay dividends, you benefit not only from the appreciation in stock price but also from regular cash payouts simply for holding the stock. It's like being rewarded for being an owner, as you hold a stake in the company you invested in.
And that's not even the best part; one of the major benefits it offers is the tax advantages.
Through such investments, you can earn more capital gains, as they are usually taxed at a lower rate than ordinary income. Just make sure you invest in qualified dividends, not ordinary dividends. Only qualified dividends have a lower capital gains tax rate, a maximum of 20% at the federal level, compared to ordinary income.
Buy Municipal Bonds
Municipal bonds are unique government bonds designed to fund infrastructure projects. When you purchase a bond, you are lending your money in exchange for being repaid the full amount with interest.
While bonds may not provide the same potential for growth as stocks, they are generally considered a much safer investment option.
Although these bonds typically pay lower interest rates, they can still offer tax benefits. In most cases, the interest earned on municipal bonds is exempt from federal, state, and even local taxes.
Failing to Invest in Yourself
A mistake people often make in their twenties is neglecting to invest in themselves.
And by that, I don’t mean spending recklessly on luxuries. But rather focusing on small, meaningful things. Whether it be reading a new book, learning a new skill, or exploring passions such as writing, art, or music.
These are the little steps that can shape your future in ways that money simply can’t buy.
And the fact that you’re here reading this proves your willingness to learn and grow.
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