Young adulthood is fraught with mistakes. And that’s understandable. The education system and our families and friends rarely prepare us for the practicalities of adulthood. Rather, we often find ourselves figuring adulthood out as we go. Perhaps nowhere is this truer than in the area of money management and personal finance. I know I made so many money mistakes in my 20s.
In this post, I discuss common money mistakes that I and/or other young adults frequently make and how to overcome them. By sharing my experience with money mistakes, I hope I help you avoid common pitfalls and identify areas where you could improve your finances. I also hope this helps you reflect on the areas you have grown in your personal finance journey and the areas you could work on.
Not Saving My Money in a High-Yield Savings Account
My first big money mistake is also, luckily, one of the easiest to fix. Specifically, I avoided putting my savings in a high-yield savings account or HYSA. Putting your money in a HYSA is as close as you’ll ever get to free money. However, many people avoid these types of accounts because of a lack of awareness or because they sound too good to be true. I know the latter was the case for me in my 20s!
What Are HYSAs?
However, HYSAs are an incredibly easy and safe way to earn money from your emergency fund and short-term savings. Basically, an HYSA is a type of savings account offered by online banking institutions. Because those online institutions don’t have the same level of costs as brick and mortar institutions, they’re able to offer their customers some better benefits.
One of those benefits is a higher interest rate on savings accounts. Indeed, conventional savings accounts earn, on average, 0.45% as of this writing. However, HYSAs earn 4.5-5%. That means if you have, say, $5,000 in a savings account, it will only earn about $23 over the course of a year compared to about $225-$250 for an HYSA returning 4.5-5%! Plus, that interest is compounded monthly, which means that return will be partialed out every month and you’ll earn interest on both your savings and the interest return.
My Experience with HYSAs
In my 20s, these kinds of savings accounts were just starting to gain traction. I didn’t trust them. HYSAs felt too good to be true and potentially scammy. Plus, it felt like too much trouble to transfer my money to a new bank. Once I finally took the plunge, I realized how easy it was to open an account. Not only that, I’ve earned literally thousands of dollars in interest from my HYSA. Last year alone I earned about $2,500 from my HSYA. And they’re not scammy at all.
Banks like Ally and SoFi actually have better ratings than many brick and mortar banks and they make it easy to transfer money in and out. Plus their HYSAs are FDIC-insured, which means that even if those banks were to collapse, your savings in those accounts are automatically insured up to $250,000. Consequently, I wish I had started my HYSA savings journey earlier to have made even more money while barely lifting a finger.
Believing Investing Is Gambling Is One of the Most Common Money Mistakes
In my 20s, one of my biggest money mistakes was believing that investing was akin to gambling. This is a common money belief that holds many people back. To be fair, there are some kinds of investing that are similar to gambling. For example, investing in a single company, especially one with roller coaster performance, is very similar to gambling. Same goes with investing in commodities that don’t produce value.
However, if you follow the advice of qualified financial professionals, investing is one of the safest things you can do with your money long-term. The key is to be diversified. If you invest in stocks from a wide variety of companies in terms of size, location, and industry, investing isn’t much of a gamble at all. Indeed, over the past 30 years, the stock market has reliably returned 7.3% per year after adjusting for inflation. Yes, the stock market reliably goes down as well. However, it has always made up for those downturns over time.
Why Not Investing Is a Bigger Risk
The bigger risk, in fact, is not investing at all and assuming you’ll have enough for retirement. We all intimately know how much inflation eats away at our money over time. The best way to beat inflation is by investing. Your savings account won’t do it. Even real estate doesn’t reliably do it. So you’re actually making a far bigger gamble that you can save millions of dollars to support you in retirement than the gamble of investing regularly in the stock market and hoping the economy continues to do well in the long-term.
If you would like a complete guide on investing, you can check out my post on how to open an investment account. Luckily, I grew comfortable with investing in my late 20s and have since been regularly investing each month. However, I wish I had started even earlier.
Indeed, the earlier you start, the more time your money has to grow. For example, financial author Michael Gilmore (the Seven Dollar Millionaire) calculated that you would need to invest only $7 a day starting at the age of 16 to reach $1 million by the time you’re 65.
Feeling Intimidated by Money-Related Topics
In my 20s, I felt very intimidated by money-related topics, particularly in the area of investing and credit cards. In fact, I didn’t use a credit card until I was 27 because I didn’t understand the benefits of doing so and thought they were risky. This feeling of intimidation around money seems to be especially prevalent for anyone who grew up feeling like they weren’t math people.
My intimidation held me back from better understanding things like HYSAs and the stock market, as mentioned above. I was always a good saver. However, I didn’t take my expertise farther than that. That is, until I reached my late 20s and started earning a better income. Once I did, I realized I wanted to better understand how to save and invest my money to prepare for my big goals.
I sought out books and podcasts and, through that process, realized that good money management is more about understanding a few basic concepts than lots of numbers. Plus, I found lots of great resources that helped explain money in a fun and accessible way. Now, I love learning about money and do not feel intimidated by these topics at all.
If you (or people you know) experience similar money intimidation, I found the following resources helpful:
- I Will Teach You to Be Rich by Ramit Sethi
- The Psychology of Money by Morgan Housel
- Stacked: Your Super Serious Guide to Money Management by Joe Saul-Sehy and Emily Guy-Birken
- The podcast Stacking Benjamins
- The podcast Afford Anything
- The Nerdwallet Smart Money podcast
- And, of course, this blog!
Not Asking for Raises or Promotions
Not asking for raises or promotions is an especially common and huge money mistake, particularly among women. As financial expert Paula Pant says, there’s a limit to how much you can cut from your budget, but there’s no limit to how much you can make. As a result, your income is a huge determinant for your ability to invest wisely for your future and live the kind of life you want. Having an income that covers your necessities and at least a few extras is also key for reducing money stress and anxiety.
Many people believe that their employees will just give them raises or promotions if they work hard and perform well. However, that’s rarely the case. For one thing, managers are often busy with many competing priorities. It may not be on their radar to fight for a promotion for you. For another thing, businesses want to cut costs. As a result, they may not be actively seeking to give people raises unless those people ask for them.
I believed that my employer would give me a raise over time, especially after years of exceptional performance reviews. But that raise never came. I had to advocate for myself for a year before the raise finally came through. To get that raise, I followed the advice I give in my post on asking for a promotion.
Consequently, don’t wait for your boss to give you a raise or promotion. Ask for one. Follow the guidance in my post and, even after you get a raise or a promotion, continue to pursue additional raises in the future. Your best advocate is yourself.
Not Defining My Money Values
One of the biggest money mistakes I made in my 20s was not defining my money values. Your money values inform where you want to focus your spending and where you can cut.
For example, I highly value my health and family. That means that I focus my discretionary spending on experiences and items that promote my health, like massages, acupuncture, and healthy food. I also focus my discretionary spending on experiences I can share with my family. However, things I don’t highly value, like clothes, technology, and dining out, are ruthlessly reduced in my spending.
Ramit Sethi goes over these concepts in detail in his book I Will Teach You To Be Rich. His central concept is that we should focus on living our version of a rich life. And that version will be informed by our money values. When we spend on things we highly value (and can afford), we should not feel guilty.
This was a radical concept for me and one I’m still working on. As I’ll go over in my next money mistake below, I struggle to not feel guilty about spending on anything at all. However, I wish I had defined my money values sooner so that I could have this framework to better guide my spending. If you identify with this money mistake, reflect on your own values. Consider how you could direct your spending to support those values and identify areas that you don’t value that you can cut back on. Ramit Sethi’s free conscious spending plan can help with that.
My Surprising Money Mistakes: Spending Too Little
This money mistake aligns closely with the one above. It’s a money mistake that some will closely identify with, especially those with a scarcity mindset like me. In contrast, others may experience the opposite money mistake of spending too much and I’ll go over that one at the end!
As noted above, Ramit Sethi argues that we should spend lavishly on the things we value and not feel guilty about it. However, I have always felt a lot of guilt around spending. Especially when I was saving for a house. Every purchase became money that would not go to the down payment.
In retrospect, I wish I had spent more on things I really valued. For the most part, I luckily didn’t miss out on much because of my frugality. However, I do wish I had traveled more in my 20s and spent more money on date nights with Andrew, especially before we got our very needy puppy. This is where defining your money values and then practicing spending on those values is so important.
If you have the same issue as me, try challenging yourself to spend a small amount each week on a particular money value and then work up from there. It might even just be challenging yourself to buy the $5 coffee once per week that you really enjoy. Or buying the organic berries at the store. Practice until it becomes easier, and then you can revise that weekly or monthly amount to whatever makes sense financially and personally for you.
One of the Biggest Money Mistakes Is Choosing An Incompatible Partner
Choosing the right partner for us is one of the most important decisions we can make in our lives. It affects our mental health, physical health, and, importantly for this post, our finances. Indeed, one of the most common reasons for divorce is difficulty with finances. Plus, divorce is extremely expensive. So choosing a good partner for you can make or break your finances in the long run.
However, few of us discuss finances with our partners until we get married. That’s a big mistake. Instead, take the opportunity to discuss your money values with your partner, how you approach finances, and whether either of you have major debt early in your relationship. Moving in together is another great opportunity to see how you approach spending and to have those discussions.
Luckily, Andrew and I are closely aligned in our money values. We combined our finances when we bought a house, developed a shared budget, and proportionately allocate our income to our shared expenses so that we are each fairly contributing. We also each have our own pool of money we can spend on whatever we want. Moreover, we both value health and family and so spend more generously on those things.
In contrast, my relationship prior to Andrew was not financially healthy. While we were both very frugal, my ex criticized me whenever I spent money on anything, particularly when I spent money on family, which, as mentioned above, is a big value for me. We were not aligned with our money goals and he reinforced my money mistakes around spending too little and not defining my money values. For a wide variety of reasons, including financial reasons, I am so glad I ended that relationship.
Other Common Money Mistakes For People in Their 20s
The money mistakes above are the biggest ones that I’ve experienced. However, there are a variety of other very common money mistakes that people make in their 20s (and beyond). I go over a few of the most common and important ones below.
Getting into credit card debt
First, many young people struggle with credit card debt. Indeed, few of us are taught how to responsibly use credit cards as kids and teens. Consequently, when we go off to college or become independent for the first time, we can get swept up in the ease of using credit cards without understanding their downsides. Moreover, credit card companies frequently target their marketing to college students, knowing that they have little understanding of the interest and penalties around overusing credit cards.
So if you are new to credit cards, try doing a little research before you start using them. Having a credit card is great for building your credit score. However, it’s important to always pay your credit card off in full and on time. If possible, set up auto-pay so you’ll never forget. Additionally, only open up one (maybe two) credit cards and focus on those with low fees and decent benefits. Nerdwallet has a great comparison of the best no fee credit cards.
Not contributing enough to max out your employer match
If your employer provides a company match to your retirement contributions, you should always try to get the maximum match. That means that if your employer matches up to 5% of your income for your retirement contributions, you should always try to contribute 5%. If you don’t, you’re basically leaving free money on the table. And not only that, that free money compounds over time because you’ll be earning interest on that free money.
Sometimes it’s not financially possible to contribute up to the maximum match. However, to the best of your ability, prioritize contributing up to that amount even if it means cutting elsewhere. Your future self will thank you.
Believing they need to buy real estate ASAP
I’ve talked to so many people who believe that renting is throwing money away. Not so. When you rent, you pay for a service. That service is a roof over your head, freedom from having to worry or pay for maintenance or many of the phantom costs around owning a property, and the ability to move when you want.
If you believe that renting is throwing money away, keep in mind that you will often throw just as much if not more money away in paying interest and taxes if you own a home. Indeed, now that Andrew and I own our home, 80% of our monthly mortgage payment goes towards interest and taxes. Only 20% goes towards paying down the principal on our loan. Plus, our monthly mortgage payment is over 2.5 times higher than what we paid for rent.
I don’t regret our decision to buy. I love our home and the fact that we have more control over what we do with our home. However, I also don’t regret our decision to rent for many years. Renting allowed us to save money on our monthly housing payment so we could save up until we were ready to buy. It also gave us the financial flexibility to do things we loved.
So both renting and buying involve paying for certain values. Which you pick depends on where you are at financially and emotionally and which better fits your goals. For more information on buying, you can see my post on the lessons I learned from buying a home.
Final Thoughts on Money Mistakes I Made in My 20s
Few of us are explicitly taught how to manage our money well. As a result, our early adulthood is often fraught with money mistakes and confusion. I know that was the case for me! From being scared of investing to not having clear money values and more, I made many mistakes. Luckily, we have access to so many incredible personal finance resources to help us become more comfortable with money management. I hope this blog can be one of those informative resources as well!
What have been your biggest money mistakes? And what have you found useful for overcoming those mistakes? Let me know in the comments!
If you enjoyed this article, please consider liking, subscribing, or sharing with others. It’s always a huge help! Interested in related content? Check out my posts on saving for multiple goals, how to save for retirement, how to open an investment account, how your money psychology is holding your back, and more in our personal finance section.
Additionally, remember that I am not a financial advisor. The information in this article is solely for entertainment purposes and does not constitute financial advice. Before making any financial decisions, speak to a professional.