Most of us know the feeling of being in our 20’s and invincible. Heck, I’m still in that age group. We want to believe the life that lies ahead is our open canvas.
But I’ve already learned a few things about pitfalls to avoid as we swing through our 20-something years. And there are many… Recognize any of these bad boys?
- Believing you’re above principles. Mantras like “spend less than you earn” are not just a saying. For every month you violate these principles, you will spend two paying your way out. Don’t ignore the basics of personal finance.
- Making big purchases too early. I understand–you just got out of college and you want to make a big statement. Kids aren’t on the scene yet, and it’s very possible that you’re single. That hot-rod Mustang is looking mighty fine…
- Not respecting the power of time. When it comes to the power of compound interest to grow your retirement savings, every year…scratch that; every second you waste has huge impacts on your final balance at retirement. What are you waiting for?
- Limiting your flexibility. Having a goal to focus on is great, but the world today requires you to keep a reactionary mindset. Don’t limit your flexibility by sticking to a 20-year-plan that’s carved in stone.
- Letting “fun” be the deciding factor. Chances are, you made decisions in your younger years with a simple question–“How much fun is this going to be?” If you keep doing it, your money’s just going to run out.
- Spending reactively. Your car breaks, you fix it. The tax bill comes due, you borrow money from grandma. There is a better way–be proactive with your spending (fix and maintain things before they break) and plan for irregular expenses (with a budget).
- Over-insuring. If you’re single with little debt, why are you carrying $250,000 in life insurance? What about your vehicle’s liability insurance? $30,000 in renter’s insurance when you barely own anything? Keep it in check.
- Working reactively. What will be will be…I’m just here “for now.” That’s the attitude of many Gen Y workers, and it pisses me off. Not because you lack direction, but because you drag the whole company back with your care-free attitude.
- Not budgeting. Budget is like the 6-letter word that melts the brains of most 20-somethings. Do it anyway. It is the only way to know right from left when it comes to where your money is going. Checking your bank balance only works in college. Trust me.
- Going into marriage with financial secrets. Many of you are getting married in your 20’s. Don’t go into what (should be) the rest of your life with financial secrets. You’re just waiting until that can of worms gets opened up and dropped on your head.
- Locking yourself out of future options. It’s foolish–no, it’s absolutely downright crazy to do anything that limits your options in the future. All right, so sometimes we have no choice–we have to sign that contract, or we have to take out that loan. Limit the have-to’s and think long and hard.
- Neglecting care of assets. If you don’t take care of your car regularly, what do you think happens? Sure, it runs fine for a while. Then the thing blows up in your face. Most older people know this–unfortunately, us 20 somethings are still fairly naive.
- Not building an emergency fund. Please let this be the first thing you do when you get out of school. Better yet, do it while you’re in high school. A friend of mine amassed $20,000 while in college (that’s savings, not debt) by being downright smart (and cheap). When money got tight in grad school, that was his saving grace.
- Getting too focused on the tools. If the methodology is solid, it doesn’t matter how you do it. There is no magic tool to “fix” your money if you don’t understand the basic principles of what you’re doing. If something’s not working, go back to the drawing board, not to the latest software release.
- Assuming income will rise indefinitely. Ahh, yes. We are young, and we are smart. And the older we get, the more experience we “pack on” to our resume, and our income will follow along. Until, of course, we get laid off or fired, or decide to switch careers, or a multitude of other factors we can’t possibly predict. Never plan for future income. Promise me that much if nothing else.
I’ve fallen for many of these pitfalls myself. Learning from the mistakes of others is not a weakness–it’s the smartest thing you can do for yourself.
Do you have a favorite pitfall from your 20’s you’d like to share?
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Great read.Can’t agree enough with the making big purchases too quickly point. I have a few friends who bought a fun car too quick and never considered the payment plus insurance, gas and other stuff. The payment they saw on TV suddenly sky rocketed once they drove off the lot.
I really wish someone had told me to save money while I was in college. People just sort of act like going into debt is inevitable.
I’m not sure if it’s people not telling us (because people definitely told me), or the fact that we’re just young and it falls on deaf ears.
So I definitely wish I was more open and forward-thinking in my college years.
Some solid advice here. It’s refreshing to read something like this, unlike the rest of the garbage regurgitated from site to site. Thanks for the fresh content and keep up the great work!
Why, thank you! Hope you stick around for more! 🙂
I like this article, some good info in there. I was wondering how to resolve being flexible and keeping our options open, with long-term savings like IRAs or 401ks, etc.? I’m not overly familiar with those types of accounts, but they seem fairly standard and controlled…is there a way to take advantage of them without limiting future options, or do you suggest some other type of savings plan?
Westpug,
Hard proponents of retirement savings would argue that it’s one exception to the rule of flexibility, because you DON’T want to be able to access that money very easily. You can subscribe to that approach, as it may work well in some cases.
Personally, however, I like to know I can at tap into the money as a last resort. From a standpoint of accessibility and red tape, the Roth IRA is probably the easiest of the vehicles I own (not counting just your standard savings account). The 401(k) can be tough to get money quickly, because you’re often at the mercy of your employer and/or accounts manager on how fast that gets processed.
Don’t forget–you can tap Roth IRA money without penalties for things like house down payments, medical expenses and other big ticket items, which gives you a LOT of flexibility. Ultimately, you’ll need to balance how much is being saved in a tax-advantaged account vs. what’s sitting in a taxable, immediately available savings/investment account.
Question for you, Wojciech: If we’re never *ever* supposed to rely on future income, how is it we should plan to pay down existing debt? I have a car loan and massive student loans that I’ve recently committed to paying off early, but it will still take many years of income at or above my current level to maintain my projected schedule. What do you think?
TC – I feel there’s a big difference between relying on future income, and projecting for it.
Relying on it means assuming that it will be there and making purchases today that reflect this assumption. I think that’s very different than planning ahead on something like a debt down payment plan (or any type of debt reduction/savings plan), where the lack of that income will set you back on your goal, but won’t devastate you.
So to answer your question–I think it’s very much a good thing to assume increasing income in your debt reduction plan. It will be a great motivator for that purpose.
This is much better advice than what Michelle Singletary offers in her Color of Money column for the Washington Post. At one point, she completely dismisses the concerns of one of her readers and tells this nice fairy tale of a guy who paid off $60,000 of student loans by cutting out vacations, and not buying anything for 3 weeks… but him and his wife don’t make “boatloads” of money.
http://www.washingtonpost.com/wp-dyn/content/discussion/2009/12/14/DI2009121401286.html
Thanks Edward. Yes, reality and stellar examples don’t often mix. Thank you for sharing the link.
Well said sir. I am constantly surprised at how few people do the “simple things” that make all the difference. If all you did was try to put away $50-$100 every single month into a high-yield savings account, you would be worlds ahead of the vast majority of people just coming out of college. You don’t need a complex plan to be alright, you just need to be consistent and be aware.
Nice post!
Agreed! I think part of the appeal of making things complicated is believing that the “system” we’re setting up is somehow going to do the hard work for us. Of course, it never works out quite that way.
It’s much easier to learn the habits of personal finance early and in simple terms, and worry about complicating your life later. 🙂
Nicely done!
I think we all get to a point in our 20’s, where we think we’re above common sense. I know I have been there before. Hopefully, not returning .
Ha! Well said. Learning from our mistakes is a topic for another day. 🙂
My husband is a stickler for saving every penny he can – me, not so much. I have to say that I was really thankful though in October 2008. Everything was crashing and my husband had managed to save $13,000 without my noticing. It really has kept us afloat this last year, so my advice (slightly tongue in cheek) is if you can’t create a budget yourself, marry someone who can 🙂
Touche! 🙂 Funny enough, I just read some research that points to the fact that most spenders marry savers, and vice versa. So it sounds like your experience is not uncommon. I can attest to the same fact in my own marriage. 🙂 The balance ends up being very valuable…
good tips. not many 18-30 year olds realize that the financial foundation they lay in the their twenties will stay with them for the rest of their lives.
Here’s my list of tips (a little more hardcore) for recent grads (or twenty somethings):
http://www.scordo.com/2008/12/ten-tips-for-recent-college-gr.html
Vince Scordo
Great set of tips, Vince. Thank you for sharing the link.
I think we can reasonably recover from some bad decisions in our 20’s, but so many things rely on time (like long-term savings and income levels) that these critical choices early on are really what you say they are–the financial foundation for the rest of our lives.
It’s funny for me to read this, but I look at my friends and I can see a lot of it. I started to take full fiscal responsibility for myself & my husband at 19, I’m 21 now. I have almost $3k in investment accounts (all funded myself on a part-time retail college job, taxable & retirement), a tiny emergency fund (mostly for car repairs, my income isn’t necessary and can be lost, husband’s military so no surprises there) and debt that’s 99% student loans. (Plus ~$700 more I need to pay off a car loan that I was using to build credit for myself.)
Really, the worst I’ve got is a large bit of student loans, and I’m planning to devote two or three good working years to axing those off, and then it’s all pretty much up to me what I do with my life… And I like that feeling. 🙂 We’re fairly financially secure for our age, it could be better but it could be a lot worse too!
What Holly mentions is key — some people limit thinking to the “monthly payment” mentality, which I see a lot. “I can afford this car because I can afford the monthly payment,” isn’t always true.
Hey Meg–sounds like you’re way ahead of the game. Good for you!! My roomate in college really inspired me to save–he had over $20,000 put away by the time he left undergraduate work. You can bet that helped him big-time in grad school!
And Ditto on the monthly payment–it’s a horrible, horrible way of thinking about purchases.
I’m recently out of my 20’s, but still recognize a lot of 20s traits and behaviors… this is a great list for reminding 20-somethings that they really do belong to the same real world as the rest of us;) and the same rules do apply….
True…not sure why so many 20-somethings feel like they live above the rules. Certainly, we can excel and break boundaries, but we can do it with a healthy respect for the basic principles that govern personal finance. At least that’s how I feel…
At 28, I have finally learned to budget… most importantly, I’ve learned that not every dime needs to be spent! For the first time in my whole life, I have an emergency fund. It’s not huge, but it’s enough to know that I don’t *have* to stay in any job if I don’t want to, that I’ll survive a layoff, a health crisis, a car crisis, etc. The peace of mind is unreal.
I think another pothole of twenty-something thinking is that we can just put it on a credit card… I wish someone would’ve told me earlier that just because I could “afford” the monthly payments didn’t mean I could actually afford the item.
Great point, Holly. A lot of 20-somethings see the monthly payment as their obligation, not the entire purchase price, and make decisions based on that. Not only credit cards, but the same goes for buying cars, homes, etc…
Definitely a great post. You mention flexibility in a could of different ways and I think that is a big one for all people. I see too many people make decision that tie up their money and limit their options for years or even decades ahead. The one guarantee in all of the financial world is that things will change. Flexibility allows you to adjust with the changes that happen.
Amen, amen, amen. My #1 financial principle is to always give yourself options in the future based on what you do now.
Love this post because it is absolutely true! I know many people in their 30’s saying…”If I knew then what I know now would have made a huge difference in my life”…and I’ll admit it, I say the same thing. But it’s never too late to change your ways. Thank you for this valuable post.
It’s funny you say that, because at 29 I just left the corporate world and I’m heading back to school and freelancing full-time. So I actually DO know now. And since I’m doing it ‘now’, I’ve got a chance.
It’s so true–some things are just a lesson you have to learn (parenting being probably the most important). But there are so many others, particularly with money, where listening to those much older and more experienced than you can pay off in such big ways. Those “I wish I could have…” lessons are incredibly valuable for me, personally, and I’m sure those open to such learning have had the same experience.
Before I became a nerd full-time, I managed money for assets held in trust. I saw how people with a ‘steady’ income (albeit not from working) would spent every dime of it and if anything would come up, they’d run back to the trust asking (begging) for more money. And then get upset because they wouldn’t get it.
Let’s face it: saving money is boring and has no ‘immediate’ gratification. I’ve been saving on a good schedule for about a year now, and when my dog had to have emergency surgery a few months ago, it was a great relief to pay in cash. THAT was the reward.
That’s a very interesting perspective, and a good lesson for you (and the rest of us) to learn from.
One of my peers wrote a very interesting post a few months ago (of course, I can’t find it now) about savings. It was a very interesting read, and the basic premise was that by virtue of savings decreasing your financial stress levels, you ARE receiving some instant gratification. Pretty cool if you think about it like that.
Great post, man! My favorite is actually the last one. We certainly do expect that as we get older our salary and income will just naturally increase. Such a nice thought, but a lot of work goes into building a steady increasing income.
Thanks Rich! That is also one of my favorites and very much in line with some of the earlier comments about “keeping options open” in the future.
A couple of years ago, we almost bought a house, “stretching” with the assumption that we would SURELY get a raise soon. Well, a couple of paycuts later, we were proven very wrong. 🙂
How much would you recommend putting aside monthly for an emergency fund?? Especially when you’re not making very much!!
If it helps, I only set aside $50/month for an emergency fund; last year I made $16k gross.
It’s not so much how much you set aside as it is developing the habit of setting some aside. Anything is better than nothing.
Tough to say since everyone’s budgets are so different. Meg’s point is a good one–making an effort to create the habit is step 1, since it will stay with you for life. You can always adjust the amount up and down, it doesn’t matter if you start with $5.
One strategy that has worked well for us when income was very, very small is weekly and/or even daily deposits to savings. It makes them seem a lot smaller and manageable, but at the end of the month, you’ve actually made good progress.
Thank you both for your replies! I’ve simply been reading more about the importance of having an emergency fund and realized my husband and I don’t really have one. I will definitely be discussing it with him!
I like that this is not telling people what you should be doing, but going at it from the other side! 🙂
Thanks Mrs. Money. Good to see you’ve made it over to Untemplater! 🙂
Holy moley. This is a great post! It’s like a huge slap-in-the-face for me to wake up and see the reality of my financial naivete/irresponsibility. Dang, I have A LOT to learn! Seriously, thanks for the enlightenment. :]
Thanks Dariane! Most of these were lessons learned the hard way, unfortunately. 🙂 Hope you can navigate the financial waters better than I have.
great article, nice to read something simple and clear, made me sit up straight in my chair, thanks
I have that effect on people. 🙂 lol Happy to hear you enjoyed the article.