5 Common Financial Mistakes 20 Somethings Make That Destroys Their Wealth

Your 20s is a magical time in your life. You are starting off your career and have big dreams for how you want your life to turn out. But lurking underneath the fun times are financial mistakes that can completely derail your future.

Sadly, many 20 somethings fall victim to common financial mistakes that destroys their wealth. And many times, they just don’t realize how major of an impact these mistakes can have.

Even worse, you don’t realize they are financial mistakes in the first place. You think you are making smart decisions, but in reality, you are sabotaging your future.

As a result, it is critical that we look at these common financial mistakes 20 somethings make and how these mistakes destroy your wealth.

In this post, we will go over the 5 biggest and most common financial mistakes and work to make sure you don’t make them. Or in some cases, limit the damage that has already be done.

5 Common Financial Mistakes 20 Somethings Make That Destroys Their Wealth

#1. Keeping Up With Others

This is a classic blunder that most 20 somethings make. Up until now, you were scrapping by financially. You might have worked a part time job earning a few bucks or had the bank of Mom and Dad pay you an allowance.

But you never earned a decent income. Now that you landed your first job, you see this large paycheck and think you are rich. As a result, you start living a lifestyle by comparing yourself to others. You see someone else with a nice apartment, so you want to upgrade yours.

You see someone else with a brand new car and you want that too. You start spending your money on things because you see others with these things and think these things equals success. But they don’t.

What is happening is you are solidifying your spot in the poorhouse. By trying to keep up with others, you will keep spending money and rarely save anything. The result is you will have to keep working just to afford your lifestyle.

And even worse, you won’t find any happiness doing this. You will think you are happy in the short term, but that happiness isn’t really happiness. It’s just an endorphin rush that makes you feel good in the moment.

So how do you avoid keeping up with others when you are exposed to these people every day? The simplest solution I have found is to sit down and determine what you value. When you do this, you can confidently spend money on what truly brings you joy and not buy the other stuff.

And by knowing your values, you won’t feel tempted to keep up or buy these other things because you will know they don’t matter to you.

Your action plan: Take time to understand what you value and spend money on these things.

#2. Not Paying Off Student Loans

It might seem like a good idea to pay the minimum on your student loans now. You would rather live life today and you can’t do that if you are paying extra each month on your debt. But there are 2 major consequences of not paying off your student loans.

First, there is the interest charge. The longer you take to pay off your student loans, the more interest you are paying to the company that holds the loan. For example, if you take 20 years to pay off a $50,000 loan at 6%, you are paying almost $36,000 in interest!

The second issue is one that many people don’t realize. They are taking their time paying off their student loans because of the student loan forgiveness program for income based payment plans.

These plans state that any balances remaining after 20 or 25 years of payments are forgiven. This sounds great! But any amount forgiven is considered taxable income by the IRS. What does this mean?

Let’s say tax rates stay the same and in 25 years, you are married filing jointly and earning a total of $74,000 in income. Your student loans are forgiven, and the balance remaining was $10,000.

This $10,000 is added to your income for tax purposes. So instead of owing just over $9,000 in taxes, you now owe close to $12,000 in taxes. Since money is withheld from your paycheck based on the $9,000 figure, you are going to have to come up with $3,000 come tax time. Or if you were expecting a refund, you will be surprised when you don’t get one.

Your action plan: Pay off your student loans as quickly as possible. I know that money might be tight and paying off your debt isn’t exciting, but doing so allows you to start building wealth in your 20s. This opens many doors and allows you to take advantage of opportunities that come your way.

#3. Not Investing

Another major mistake 20 somethings make is not starting to invest right away. When it comes to investing, time is your best friend. The longer your money is invested, the more it can grow.

I’m sure you have heard the story of Jack and Jill, where Jack starts investing today and Jill waits 10 years? If not, here is a brief version.

Jack and Jill are both 25 years old. Jack starts investing $100 a month for 10 years then stops. He earns 8% during this time. Jill waits 10 years and then starts investing $100 a month. She invests this amount for 25 years and earns the same 8% each year.

In all, Jack saved $12,000 which grew to roughly $189,000 by the time he is 65. Jill saved $30,000 which grew to just more than $139,000 by the time she is 65.

Jack saved $18,000 less than Jill but ended up with close to $50,000 more than Jill. The reason is because of time. Jack took advantage of it while Jill decided to wait.

In real life, the discrepancy is usually larger. This is because by waiting 10 years, these people tend have a family and have more expenses, so it is even harder to put aside some money every month. As a result, they put off investing even longer or never start at all.

But if you start investing early, you make it a habit and it is easier to keep saving every single money.

How do you start investing today when you don’t have a lot of money? Thanks to technology, there are a handful of robo-advisors out there that let you invest with $10 or less every month. Some even let you invest your spare change!

Your action step: Start putting money into an investment account today. Don’t think you can’t afford to start investing. You can’t afford not to.

#4. Going To Graduate School Right From Undergrad

You just graduated and want to head right to graduate school. Your thinking is that by having an advanced degree you will look more desirable to potential companies and you will earn a higher salary too.

The reality is many times this backfires. I’ve seen it happen many times in real life at various companies. We get a resume that looks amazing. The only problem is that the candidate wants advanced pay for entry level work. Or you have no work history to prove your worth.

The truth is many companies don’t want to spend large amounts of money on people with little to no work history. They have no basis for how good a worker you are or even if you have the ability to hold a job.

As a result, they pass on you and hire someone with less education for a lower salary. While this isn’t always the case, it happens more times than people realize.

So how do you avoid spending thousands on graduate school only to find a difficult time landing a job? Get a job after you graduate. This solves a few problems. First, it ensures you actually enjoy the work before paying money to get more education.

Second, you build up a work history which you can then show to future employers to make it easier to land a job.

And finally, many times your employer will pay for you to get your graduate degree. This is what happened to me. I paid less than 20% of the cost for my graduate degree. My employer paid the rest.

Your action step: Focus on getting a job after college, then having your employer pay for graduate school.

#5. Staying In Relationships That Go Nowhere

While relationships might not seem like financial mistakes, if you ever were in a relationship with the wrong person financially, you know it can be.

The classic example is one person is a spender and the other is a saver. Many times this just doesn’t work out. You will always have issues about saving too much or spending too much. One partner will want to enjoy more of life now while the other one wants to enjoy life but make sure the future is solid too.

I can attest to this one as well. I used to date a spender and I am a saver. Even though we regularly discussed money, there were always issues and drama. It sapped the energy and joy out of the relationship and eventually ended it.

I’m not suggesting you avoid everyone with a different financial mindset than you. But you have to stay on top of money and communicate a lot. And even then, there are other financial issues you may face.

Your action step: Be aware of money issues in your relationships and cut ties before they can do a lot of damage.

Final Thoughts

At the end of the day, these 5 money mistakes can ruin your financial future. In the moment, you might not think that much about paying extra on your student loans, starting to invest, keeping up with others, getting your graduate degree, or even the relationship you are in.

But they all have long term consequences. Your goal is to start looking more long term so you can be better off financially, which will allow you to take advantage of more opportunities in life.

The trick I use is to look at my life 5 or 10 years into the future before I make a decision. I ask myself how this decision will impact my future. Will it bring me closer to my goals or take me farther away? This helps me to make sure I am setting my future self up for the best possible future.

But don’t think I don’t enjoy today by doing this. There is a balance with this. You just have to find your balance point where you enjoy life today and still make sure you are covered in the future.

Author Bio: Jon Dulin helps readers get out of debt, begin investing, and achieve their financial dreams. You can find more of his work on his website, MoneySmartGuides.com.