The 3 Worst Financial Mistakes You Could Make In Your 20s
KEY POINTS
- Waiting to start investing is one of the worst financial mistakes you could make in your 20s.
- It's also a huge error to commit to too many fixed expenses.
- Going deeply into debt is another error you can't afford to make early in life.
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.
If you start investing at age: | You must invest this much per month: | You'd invest this much of your own money total over your lifetime: |
---|---|---|
20 | $115.91 | $62,591 |
30 | $307.47 | $129,137 |
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.
Alert: our top-rated cash back card now has 0% intro APR until 2025
This credit card is not just good – it’s so exceptional that our experts use it personally. It features a lengthy 0% intro APR period, a cash back rate of up to 5%, and all somehow for no annual fee! Click here to read our full review for free and apply in just 2 minutes.
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.
Related Articles
View All Articles