Five Money Mistakes to Avoid in Your 20s

My childhood aspiration for adulthood was almost immediately dashed as soon as I reached adulthood. Being an adult is so hard! On top of forging a successful career and handling real-life responsibilities such as taking out the trash and folding laundry, I had to learn the ins and outs of managing my own finances, making sure that I have enough money on hand to foot the bills.

Adulting is so hard that I at times failed at it. In my early 20s, I floundered financially. I often lived paycheck to paycheck, with a depleted bank account towards the end of each month. I may not have had emergency funds in the bank, but I had several pairs of designer brand boots and ballet flats and a whole wardrobe of fancy dresses and cashmere sweaters. I ordered take-out and almost never cooked because I thought it just wasted too much of my precious time. When I was preoccupied with work, I paid for food delivery even though the restaurant was right across the road from me. When I moved into a bigger apartment and my monthly income was not sufficient to cover the additional expenses, I had to reach out to my parents for financial support. If any incident were to happen to me, I could have been easily swamped by economic mishaps with no chance of survival. I had made plans to budget and to cut down on impulsive spending, but I did not manage to follow through with those plans. To make it worse, I was convinced that how I spent my money was okay because my parents were forgiving of my expenditures and some of my friends shared a similar mindset about money–you only live once, so spend it now or not at all.

If I had continued such an extravagant and spendthrift lifestyle, I would have landed myself in so much debt. Luckily, I met my boyfriend who is now my husband. I was genuinely awed by his commitment to being self-reliant and impressed by his ability to save for his future with his modest salary. Feeling motivated, I made up my mind to turn the ship around, to take control of my finances, and to be a more independent, responsible woman. (I too share the reluctance of many other women to discuss financial matters with boyfriends or dates, but I have found it genuinely helpful to compare notes with them to ensure that you share a similar financial outlook. According to research, money matters are a common trigger for arguments in relationships.)

After micro-analyzing my poor financial decisions along the way, I have summed up a number of grave mistakes I now regret committing. I believe that some of these mistakes are common among young adults, so please read my experience below as a cautionary tale even if it does not apply to you right away.

Mistake #1: Spending Recklessly

It is a major milestone when you start your first job, and nothing can be more exciting than receiving your first paycheck. You should celebrate the start of the next phase of your adult life by treating yourself to something special. You totally deserve it! However, it does not mean that you need to go on a shopping spree and make purchases that you can barely afford. Celebrations are special because they leave you good memories; they should not cause you shopper’s remorse, or even worse, send you to financial ruin. Besides, celebrations can take on many different forms (e.g., watching a movie on Netflix, throwing a cook-out, going camping with friends). You don’t have to spend a ton of money to celebrate. Impulsive and irresponsible spending is a bad habit you want to avoid getting into.

Be more careful about how you spend. Ask yourself “how much do I have to work to afford this” each time before you check out. This question is better than many others to help put you in the right frame of mind and reconsider your purchases. Establish a savings account and devote a certain percentage of your monthly salary to it. Although whatever percentage you would like to contribute to the savings account is entirely up to you, the general rule of thumb is to save at least 20% of your after-tax pay. Start small with a goal to save towards an emergency fund which would cover up to half a year’s worth of expenses in case of unforeseeable circumstances.

Mistake #2: Not differentiating wants from needs

A common money mistake that many people in their 20s tend to make is spending an inordinate amount of money on clothes. Yes, I include men in this critique. In fact, men spend more on clothes than women do, although studies have also revealed that women tend to care more about fashion and shop more frequently than men. True, Carrie Bradshaw in her Manolo Blahnik pumps may be a thing of the past; but young adults these days are inundated by retail advertisements and influencer marketing on social media websites. You simply cannot escape from falling prey to their marketing tactics and feeling swayed to purchase an item or two so that you feel that you too share the glamor of a celebrity you idolize or an Instagram influencer you follow. Just look at the number of clothing lines or renditions different brands have put up in collaboration with celebrities.

Been there, done that! For a while, I indulged myself in “retail therapy” because I was feeling lonely, stressed, and unhappy. Shopping kept me occupied and distracted and offered an antidote to all those negative feelings. As much as I enjoyed opening packages and showing off my Louis Vuitton shoulder bag, it was the act of shopping itself that was most addicting. Understandably, people arrive at shopping addiction in different ways–some may feel obligated to create an inflated appearance in front of others, some may be tempted to be like others by following their style choices, and others may value ownership of particular items; nonetheless, what we share in common is that we have failed to differentiate wants from needs.

In economics, a need is essential to one’s survival, whereas a want is something one desires but may not be able to obtain. When we conflate the difference between the two, we tend to make unnecessary purchases, such as another pair of winter boots when we already have a pair of sturdy, waterproof Sorel or a third car when only two people in the family drive. It is difficult to curb your wants when you are not in a great financial situation, and it takes even more self-discipline to limit what you desire when you feel that those wants are likely attainable in the near future even if not right away, a common mindset for many young adults.

A simple comparison chart that shows the difference between needs and wants.

Mistake #3: Not Setting a Budget

My last point about understanding the difference between needs and wants lends itself naturally to budgeting. Too often, people early in their careers roll their eyes at the suggestion of setting a budget because whoever budgets must be either cheap or running short of funds. What they fail to acknowledge is that budgeting will allow them to control their spending on wants so that they can ultimately afford not to budget in the long haul (“many millionaires don’t have a budget”). A budget is a premeditated decision on how much you would allocate for your needs and wants. Without a budget, it can be all too easy to let your wants overtake your needs, or even worse, let your wants gradually chip away at your stash. To prevent those scenarios, you should follow the steps below when establishing a personal budget using our Excel spreadsheet:

1. Examine your monthly expenses in relation to your income carefully.

2. Categorize your expenses to see how you spend your money.

3. Determine what expenses are essential and recurring and include them as part of your budget.

4. Determine what expenses are non-essential and can be limited.

5. Set aside a small amount of money for you to splurge on non-essential purchases.

A budget will help regulate your monthly finances so that you won’t lose sight of your monthly income versus your expenses. Following a budget does not mean that you have to pare down your expenses to the bare minimum. After all, what we consider essential is likely different from its economic meaning and is very much up for grabs. Say, would you consider expenses on gym equipment essential? If it benefits your health, improves your mood, and enhances your quality of life, it is essential to you. I also recommend that you build some flexibility into your budget (my point #5 above) because it is easier to follow the budget you set when you allow yourself a treat on occasions without feeling guilty. If the budget is too rigid or does not leave you any leeway, it is likely that you will disregard the budget and revert back to your ill-budgeted lifestyle.

Obviously, the budget won’t automatically work magic on your finances unless you take actions to stick to your budget conscientiously. When you first start following a budget, it is going to be very hard, partly because you have to limit some of your frivolous expenses like a Pumpkin Spice Latte at Starbucks. (I too found it difficult to limit my budget when shopping for groceries, but I have figured out how budgeting with a shopping list can help cut down my bills.) What this means is that you need to take baby steps to get into the habit of budgeting and to work out a more strict budget over time. Start by dutifully recording your monthly expenditures, examine them closely to understand where your money goes, then set actionable budget plans. You are at liberty to adjust your budget periodically, but I personally don’t recommend making changes to it too frequently. Otherwise, you are more inclined to put off your budget plans, and setting a budget simply becomes pointless.

Mistake #4: Relying on Parents for Financial Help

Recently, a friend of mine confided to me about his predicament about living with his parents. He came back from living abroad right before the pandemic hit. Because his longtime absence in the United States has prevented him from acquiring property and accumulating wealth of his own, he has been staying with his parents ever since. Though he has been actively searching for jobs while working as a delivery driver at times, he has had no luck in landing a position. One day when he was putting together his portfolio for the job search, he got into an argument with his father, who has clearly become unhappy about the son mooching off the parents.

Although not all millennials live in their parents’ basement, many of them do receive financial help from their parents. According to a Merrill Lynch survey, 79% of parents of young adults provide them with some type of financial support. This financial support comes in the form of food/groceries, a cell phone service plan, vacations, rent/mortgage, student loans, and so on. Does this ring true to you? It surely does to me, because we still use my in-laws’ Netflix account, and the uses of additional devices cost them extra when they could have maintained a cheaper plan. If parents can afford and are willing to help, leaning on them for financial help means that you will carry less debt and possibly get ahead in your early years when you are just starting out charting a path of your own. Nonetheless, the help could make you too dependent the older you get. Once you are used to getting money from your parents, it is even more difficult to develop the ability to live within your means (as I had experienced firsthand when I had to ask my parents for help to pay for rent a few years ago). Besides, the help won’t last forever since parents cannot afford to always draw down their savings to lend you a hand.

Mistake #5: Putting off Plans to Invest

Another big mistake people in their 20s tend to make is dragging their feet to invest. They put off their plans to invest because they either lack funds or lack experience. In one of my previous posts, I shared my investment experience in the stock market and discussed what I believe are the reasons why you should start investing in the stock market in your 20s. Simply put, you should never feel too young to invest just as you are not too young to manage your finances. Investment is not exclusively reserved for the more established or more well-to-do individuals. The earlier you start, the more likely you will profit from the stock market and amass experience.

According to a Gallup survey, 55% of Americans own stock. They either own stock through a direct ownership of shares of select companies, or they invest in mutual funds which usually include a stock portfolio, or they contribute to their retirement savings account, such as 401(k) or IRA, which are also associated with stock market performance. In other words, investing in the stock market is a legitimate way to grow your wealth other than being paid for your hard work during your day job.

Sure, the stock market is volatile and risky; but if you are optimistic about the U.S. economy and can hold onto stocks for the long haul, you should give it a try and see for yourself. If you are risk-averse, bet on a safer option–max out your 401(k) contribution to the highest amount that the company offers to match. It is a no brainer.

Conclusion

Looking back on my 20s, I am embarrassed to admit that I committed all the mistakes I have listed above; and I am also proud that I have worked to fix some of them, though I am still struggling with some on occasion. If there is one last advice to offer, I would recommend that you take a moment to think about your future and start making plans.

Don’t get me wrong! I am all for living in the moment (kudos to Soul), but this does not mean you should be dismissive towards your future, especially your financial standing. Understandably, it is unrealistic for you in your 20s to picture what your life is going to be like in 30 or 40 years. But it is important for you, assuming that you ever want to gain financial security, to think ahead and save for your future early on. Do you want to buy a house? Do you want to grow your family? Do you want to retire early? If any of your answers to these questions is “yes,” you should keep a watchful eye on your expenditures and take actions to avoid and combat the five mistakes I have advised against.

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