Lord knows I made some big money mistakes in my 20’s. Thankfully, I’ve had the opportunity to redeem myself, but I still wish I’d had someone give me financial lessons back in the day. Who knows if I would have listened, but here some money mistakes to avoid in your 20’s.
I think the biggest mistake I made was to take on consumer debt. Our credit card debt didn’t peak until my mid 30’s, but if I’d slammed the door on debt from day one, we would have never had to devote so much time and energy to debt repayment when we could have been building wealth.
I also wish I could rewind and set my retirement contributions to the max from my very first eligible pay period. I could have learned to live on what was left after investing. After all, I went from earning $25,000 a year as a resident to $70,000 a year as a rookie optometrist. Don’t tell me I couldn’t have lived large on $50,000 and socked away the rest!
Instead, I let lifestyle inflation and the need for instant gratification guide me into buying too much stuff that really adds up to nothing at this point.
I traded a perfectly good, paid off Honda Accord to get a brand new car pretty soon after getting my first real job. Yes, I could afford the payment, but it started a cycle of monthly payments that took over a decade and many thousands of dollars to break. If I could go back, I would have driven that Honda into the ground and bought used going forward.
Almost all of these mistakes could have been prevented if I had a better grasp on tracking my income and spending by using a budget. Instead, I focused on whether or not I could afford the payment.
Things I Did Right In My 20’s
I can’t beat myself up completely over not making all the right financial decisions in my 20’s. I did do several things right, and some of them continue to pay off to this day.
Became an Entrepreneur
I didn’t go to school with the hope of running a business, but at the ripe old age of 28, I found myself as the sole owner of a busy optometry practice with two offices and nine employees! It obviously wasn’t an accident and happened after two years of being employed. I had time to get familiar with the day to day operations, but it was still a pretty big leap, especially when every other employee was older and had more optical experience than I did.
While running that business did eventually cause burn out, being an entrepreneur taught me tons of valuable skills.
- Desire to provide superior service
- How to deal with employees and the public in general
- Knowledge that you get out what you put in
- How to grow a thick skin
I was also able to grow the business into a valuable asset. It has been nice to enjoy the rewards of being able to sell for a nice profit. Owning that business early on also gave me the confidence to get into real estate investing and to become a contract optometrist so I don’t have to work a traditional schedule, things I would probably never have discovered working a typical 40 hour week in an employed position.
Buying Real Estate
When Jim and I bought our first house, I was 26 years old. We didn’t have a clue about homeownership, but knew we were tired of renting. Since then, we’ve sold and bought another house to live in and purchased a single family rental home, a four plex residential rental, and a commercial rental. Real estate has it’s risks and is not always smart if you don’t intend to stay put for a while, but it’s been really good to us and will fund our early retirement dreams in a few years.
While I do wish I had started saving for retirement the minute I had a job at sixteen years old, hindsight is always 20/20. I did start investing in my work retirement plan as soon as I got my first job as an optometrist and then added a Roth IRA a few years later. Even when the stock market tanked in 2008, I kept putting in money and always kept the majority in stocks. It’s not fun to watch your balance dip 30%-40% over the course of a few months, but it’s important to remember that the end game is many, many years away for twenty somethings.
While I wish I had maxed out everything from day one, the small percentage I did sock away has grown into a decent sized account over time. If you start early enough, the power of compound interest will win out over ups and downs in the stock market.
How You Can Get It Right In Your 20’s
Don’t live under the illusion that you will want to work forever
When I graduated from optometry school, all I wanted to do was find a high paying job and work. Like most of society, I assumed I would work for the next 30 or 40 years and retire in my 60’s. I think that’s why so many young people don’t start saving for retirement right way. They assume there will be plenty of time later.
The hard reality is that about 10-15 years into a career, most people experience some sort of burnout. Life situations change, and there might be more important things at the end of the day besides work. I’m sure there are some people who find that dream job and are able to work for decades doing the same thing, but just in case you aren’t one of the lucky(?) ones, it’s important to make alternative plans.
Start Tracking Your Finances From Day 1
My eight year old daughter already knows more about budgeting than I did in my 20’s. If you want to be wealthy, the key is to start keeping track of your finances from day 1. In college, students are often forced to be frugal because there probably isn’t much income to be had. Everyone should plan for the day when you will have money so that increases in income don’t equate to lifestyle inflation or debt. Luckily, it’s very easy to track income, spending, and even create a budget or investing plan at sites like Mint or Personal Capital.
Invest Early and Often
Set up automatic investments from your very first paycheck. I would whole heartedly urge young people to set their retirement contributions as high as possible, ideally maxing out 401 k contributions or at least contributing enough to get any company match. Leaving free money on the table is like flushing money down the toilet. Learn to live on what you make after investments. I can honestly say that in my 40’s, having a large retirement account balance is much more exciting than having new cars or shiny things.
If you don’t have a 401k or the investment choices aren’t good, you can always DIY retirement savings. This is a great idea even if you do max out your work plan. With so many low cost brokerages available today, if you aren’t finding what you want in an investment company, you aren’t really looking. Companies like Betterment and Motif allow beginning investors to get started with under $500, so there is no excuse to put off saving for the future.
I don’t mean that twenty somethings should never have any debt. Sometimes it’s worthwhile to leverage debt for an education or to buy a house or reliable car to take you to to work. Unless you’re independently wealthy, most young people will have to use credit for those type purchases. However, you can control consumer debt. Using credit to finance things like furniture, landscaping, vacations, or clothes insures a lifetime of payments. Consumer debt is a vicious cycle that takes away your choices, and it should avoided at all cost.
For 20 something’s, what financial steps are you trying to take to avoid financial regrets? For older readers, what money mistakes would have avoided in your 20’s if you could go back again?