5 money mistakes people make in their 20s

Life might be fun in your 20s, but it can also be financially precarious. Today’s young adults face student debts, sky-high rents, and a challenging job market, particularly for higher-paid graduate positions. Unfortunately, there are no quick fixes for cash-strapped twenty-somethings, but sensible budgeting, a smart approach to saving and debt, and even thinking about pensions can help bring finances onto a more even keel - laying the foundations for a more secure future in the decades ahead.

Below are five common money mistakes people make in their 20s, along with tips on how to avoid them.

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1. Not signing up to your workplace pension

The vast majority of people are automatically enrolled into their workplace pension when starting their first proper job. Even if your earnings are below the £10,000 threshold, your employer must inform you of your right to join the scheme. 

It can be tempting to opt out and have slightly more money in your pocket each month instead, but this can be a false economy. Staying enrolled means at least 5% of your qualifying earnings is paid into the pension plan. If you opted out, you wouldn’t receive this full amount in your take-home pay, as pension contributions benefit from income tax relief.

By paying into a pension, you’re paying less income tax and, ultimately, keeping more money for yourself. This is what’s known as tax relief and, for a basic-rate taxpayer, it typically means that a £100 contribution to your pension only costs £80 of take-home pay - with the remaining £20 added by the government.

What’s more, you will also lose out on the 3% contribution from your employer. You wouldn’t turn down a pay rise, so don’t overlook these payments, which are effectively ‘deferred pay’ from your employer. Some employers will match additional contributions you make above the minimum 5% (usually up to a maximum amount). It’s always worth considering this as, again, it’s essentially free money available to you. 

Starting a pension when you are young also means contributions have longer to grow, helping build a bigger pot. Life may be financially difficult in your 20s, but starting to save for the long term now will help to ensure it isn’t so difficult in future decades.

• Read: Saving for retirement in your 20s and 30s

2. Getting into the wrong sort of debt

Debt can feel unavoidable in your 20s, with low earnings and significant expenses such as rental deposits and moving costs. The rise of buy-now-pay-later services, credit cards, and loans makes it easy to accrue debts quickly. For many, the psychological impact of student loans, and the fact they may already owe tens of thousands of pounds, can make additional borrowing feel insignificant.

This can be a big mistake. Short-term loans and credit products are very different from student debt, and will have higher interest rates and stricter repayment schedules. Failure to keep on top of repayment can see charges and penalties ratcheting upwards in a relatively short space of time. To avoid spiralling into unmanageable debt, set a realistic monthly budget and aim to live within your means.

If you have debts (not including a student loan), paying them off should be your number one priority. 

3. Spending not saving

For the reasons listed above, living within your means is a challenge for many twenty-somethings, let alone finding extra cash for savings. However, even small, regular savings can make a difference. A good habit is to save as soon as you’re paid, rather than waiting to see what’s left at the end of the month. Setting up an automatic direct debit into a savings account helps to make it feel easy. 

Getting into the savings habit and building a nest egg can also help you avoid expensive debt, as you will have funds to call on in an emergency. Experts generally recommend having three to six months’ worth of essential spending as an emergency fund. 

Tax-efficient ISAs and high-interest savings accounts are excellent starting points. Use cash ISAs for short-term goals, such as next year’s holiday or a new phone, and consider investment ISAs or Lifetime ISAs for more medium-term and longer savings goals (i.e. those more than five years away), such as saving for a house deposit.

• Open a Stocks and Shares ISA
• Open a Self-Invested Personal Pension (SIPP)

4. Not building a robust credit history

It’s not a good idea to get into debt that you will struggle to repay. But while excessive debt is to be avoided, using credit wisely can help you start to build a stronger credit score. This score is what lenders use when deciding how risky it is to loan money to you - if they think there’s a high risk you won’t pay the money back, they will charge you a higher interest rate or perhaps not lend to you at all. 

You can improve your credit score by paying your bills (e.g. utilities, mobile phone contracts, and credit cards) on time and not exceeding credit limits. 

Demonstrating you can borrow responsibly means you are more likely to qualify for more competitive deals going forward - important when it comes to arranging more significant borrowing, such as a mortgage. 

Ideally, aim to pay off your credit card balance in full each month to avoid interest charges while building your credit profile.

5. Not taking enough risk

Many of us are happy to take risks in our personal lives, like off-piste skiing or bungee-jumping, but not with our longer-term savings. Yet, arguably, this is where taking risks - especially when you’re young - could really pay off. 

Money in pensions and investment ISA holdings should be invested for the longer-term, so you can afford to consider higher-risk funds and portfolios. These may be more volatile in the short-term but have the potential to deliver higher returns over longer time frames. 

Historically, equities (i.e. stocks and shares) have tended to outperform cash over longer periods (for example, 10 years). Higher-risk equity funds might include those invested in emerging markets, and smaller companies and technologies that have the potential to shape tomorrow’s world. However, always ensure your investments are diversified to avoid overexposure to any single share, sector, or region. 

Read more from our series:

• 5 money mistakes people make in their 30s
• 5 money mistakes people make in their 40s
• 5 money mistakes people make in their 50s
• 6 money mistakes people make in their 60s
• 5 money mistakes people make in their 70s

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.