Common Money Mistakes of Young Adults

When it comes to smart money management, there is no better teacher than experience. Unfortunately, this puts young people at a decided disadvantage. Many of the most common financial mistakes people make in their 20s can follow them for years - or even decades. Understanding common financial pitfalls can help young people avoid costly mistakes and set a stronger foundation for their financial future.

Research consistently shows that financial habits formed in early adulthood can have long-lasting impacts. A National Endowment for Financial Education study found that young adults who receive financial education are more likely to engage in positive financial behaviors, such as budgeting and saving, and less likely to run up credit card balances. But despite the importance of financial literacy, many young people enter adulthood with limited knowledge.

Common Financial Mistakes

While every individual's financial journey is unique, certain financial mistakes are particularly common among young adults:

Mismanaging Student Debt

Student loan debt has become a significant financial burden for many young adults. Common mistakes in managing student debt include:

• Borrowing more than necessary for education.
• Not understanding the terms of loans, including interest rates and repayment schedules.
• Failing to explore income-driven repayment plans or loan forgiveness programs.
• Neglecting to make payments, potentially leading to a damaged credit score and other consequences.

To avoid these pitfalls, young adults can benefit from thoroughly researching their student loan options, understanding the total cost of their education, and creating a plan for loan repayment before borrowing.

Neglecting to Save Early

The power of compound interest makes early saving one of the most effective strategies for long-term financial security. However, many young people delay saving, often due to limited income, high expenses, or a perception that retirement is too far in the future to worry about.

For example, if a 22-year-old saves $200 per month and earns a hypothetical average annual return of 7%, they could have over $600,000 by age 65. Someone who waits until age 32 to start saving the same amount could end up with less than half that - based on the same assumptions. Keep in mind that investment returns are not guaranteed, vary year to year, and actual results will differ.

Young adults can benefit from saving early, even if only a small amount. Setting up automatic transfers to a savings account or taking advantage of employer-sponsored retirement plans can help establish this habit.

Misusing Credit Cards

Credit cards can be valuable financial tools when used responsibly, but they can also lead to significant financial problems if mismanaged. Common credit card mistakes include:

• Carrying high balances and accruing high-interest charges.
• Making only minimum payments.
• Using credit cards for unnecessary purchases.
• Opening too many credit cards in a short period.

These behaviors can lead to mounting debt and damaged credit scores, which can have long-term implications for financial health.

To use credit cards wisely, young adults can focus on paying off balances in full each month, using cards for planned purchases rather than impulse buys, and understanding the terms and conditions of their cards, including interest rates and fees.

Living Beyond Their Means

Living beyond their means is one of the most common financial mistakes young people make. This often stems from a desire to maintain a certain lifestyle, keep up with peers, or simply from a lack of awareness about their actual financial situation.

Spending more than you earn can show up in a few ways:

• Renting an apartment that costs more than 30% of one's income (though the share that works depends on income, local housing costs, and other expenses).
• Frequently dining out or ordering expensive takeout.
• Buying the latest gadgets or designer items that aren't within budget.
• Taking lavish vacations on credit.

The consequences of this behavior can be severe, leading to mounting debt, insufficient savings, and financial stress. To avoid this pitfall, young adults can benefit from creating and sticking to a realistic budget based on their income, not their desired lifestyle.

Not Budgeting

The failure to create and follow a budget is closely related to living beyond one's means. Many young adults avoid budgeting, seeing it as restrictive or time-consuming. However, a budget is simply a tool for understanding and controlling one's finances. Without it, overspending unknowingly or failing to set financial priorities is all too easy.

Never Starting an Emergency Fund

Life is unpredictable, and financial emergencies can arise at any time. Whether it's a medical expense, car repair, or sudden job loss, having an emergency fund can prevent a temporary setback from becoming a financial disaster.

Despite its importance, many people find it hard to start an emergency fund. A survey by Bankrate found that only 41% of Americans could cover a $1,000 emergency expense from savings.

A commonly cited guideline is to save 3-6 months of living expenses in an easily accessible account - though the right amount depends on factors like job stability, household size, and personal risk tolerance. Even a modest fund of a few thousand dollars can go a long way toward preventing unexpected debt.

Not Investing for the Long Term

Many young people delay investing, often due to a lack of knowledge, fear of risk, or a belief that they need more money to start. However, time is one of the biggest factors in building wealth through investing. Common investing mistakes include leaving long-term savings in accounts that pay very little interest and not signing up for an employer retirement plan - especially when the employer adds money to what you contribute (often called a match).

While investing does involve risk, historically, a diversified investment portfolio has outperformed savings accounts over the long term - though past performance doesn't guarantee future results. Young adults can benefit from learning investing basics and looking at widely used options such as index funds, which track a broad market, and target-date funds, which adjust their mix as a chosen retirement year gets closer.

Neglecting Insurance

Insurance is easy to put off, especially early in adulthood when health issues or major losses can feel unlikely. Coverage gaps can include health insurance, renter's insurance, or life insurance for those with dependents.

While insurance premiums may seem like an unnecessary expense, lack of coverage can lead to financial catastrophe in the event of an accident, illness, or disaster. Young adults may want to review their insurance needs periodically and compare coverage options to find a plan that fits their situation and budget.

Avoiding The Pitfalls

While these financial mistakes are common, they are not inevitable. Young adults can take several steps to build a solid financial foundation:

• Learn about personal finance through books and resources like this website.
• Saving and investing early, even in small amounts.
• Building a budget that fits their financial goals.
• Using credit in a way they can manage, and prioritizing high-interest debt when possible.
• Build an emergency fund to prepare for unexpected expenses.
• Take advantage of employer-sponsored retirement plans and other benefits.
• Consider insurance needs and obtain appropriate coverage.

The Takeaway

Everyone's financial situation is unique, and what works for one person may not work for another. Minimizing common mistakes, however, is the first step toward financial success. The key for young adults is to be proactive about financial management, continually educate themselves, and make informed decisions based on their individual circumstances and goals.