The Unlucky 7: The Top 7 Financial Bloopers Young Professionals Should Avoid
We talk a lot about what you, as a well-informed personal finance enthusiast, can do RIGHT in order to reach your financial goals.
We don’t often talk about what you can do WRONG, despite it being equally, if not more important.
So, I decided to compile a list of 10 of the most common (and harmful) young professional financial blunders.
I have seen a lot of friends and peers commit these financial sins and have even committed a few myself. Hopefully, I can save you the frustration and regret that comes days, months, or even years later.
1. Holding off on Saving for Retirement
It is common for many young professionals to hold off on saving for retirement in order to finance their present day lifestyle. With a tinge of arrogance, many of us believe that we can hold off because we have so many years ahead to focus on retirement. In reality:
- The longer we delay in investing for retirement, the more we miss out on the power of compound interest. For example, an individual who saves $5,000 per year starting at age 20 and ending at age 40, while earning 11% annualized would end with nearly $6 million per year. Meanwhile, an individual who waits 10 years until age 30, then contributes $10,000 per year until age 67 would end up with only $4.6 million. In other words, waiting 10 years leaves you with less earnings despite investing almost twice as long and twice as much. Lesson: don’t wait!
- When we don’t launch, it’s easy to keep putting it off. Some habits are best started early.
- Income is rarely ever a continuous upward line as many of us hope. If we wait to invest, expecting that we’ll be able to catch up later on increased earnings, what happens when our earnings don’t increase, or actually go down?
Lesson learned: start investing as soon as you have the means!
2. Buying More Car than you Need
Somewhere along the way, automakers convinced the American public that our identities were intertwined with our vehicles. It was a brilliant piece of marketing. Riding the bus, your bike, or buying a cheap used vehicle as only a means to get from point a to point b will often earn you grief from your friends and a guilty conscience for feeling like you didn’t treat yourself to what you deserved.
I bought more car than I needed and when I finally figured it out, I sold my car and started riding the bus to work. I estimate that it saves me $3,000+ per year (and that’s on the low end).
When you’re a millionaire looking for happiness through purchases, buying your dream car makes perfect sense. Otherwise? Not so much.
Lesson learned: when you’re struggling to get out of debt, buying a car above your means can deliver a huge financial blow to you. If you need a car to get from point a to point b, get a reliable, fuel-efficient vehicle that is cheap to insure.
3. Relying Too Much on College to Find your Calling
At the start of college, I didn’t know what I wanted to do with myself. After the first year, I still didn’t. Second. Third. Fourth. Graduation, still no clue. But I made it through, got a horrible first job, then a second, and now a I’m on a third. I still can’t say with 100% certainty that I’m in my ‘dream job’. And now that I’ve been in the workforce for a few years, I don’t know that ‘dream jobs’ are myth or reality.
The lesson here is that I and many others on the 5, 6, 8, or 10 year plans never were really able to find ourselves via school. As a result, we spent more than we should on our education without much additional benefit (and lost critical income while we were doing it).
Lesson learned: work your way through it. The only way to find yourself is to get out in the world and test yourself with experience. It’s a different kind of school – the School of Hard Knocks. Tuition: free.
4. Building Too Much Student Debt
Taking on student debt in order to get an education can result in an incredible return on investment. But that does not mean that student debt should be accepted as a necessary evil. As I’ve highlighted recently, student debt has now topped credit card debt in the U.S. for the first time. And total student debt is over $1 trillion (5 times what it was just 10 years ago).
Once you build this debt, you will be hard pressed to dig yourself out. 60% of employers are now doing credit checks, providing further reason to avoid too much debt before you hit the job market.
Lesson Learned: Don’t accept student debt. Fight it. Whether it’s applying for scholarships or financial aid, working while in school, not using credit cards, or saving enough for school ahead of time, there are a number of ways to stray from the norm.
5. Not Putting Together a Budget (& Sticking to it)
If you gain anything from this post, let this be it: start a monthly budget.
An income earner without a budget is like a ship without a sail. But what percent of us don’t even bother? I didn’t for years, and I’m convinced that it was the sole reason why I wasn’t able to save for retirement for my first two years after graduation.
Spend a few hours and:
- Document all monthly income.
- Document all recurring monthly expenses.
- Document future anticipated expenses.
- Attack any and every expense that can possibly be lowered.
Use this budget spreadsheet that I have personally put together to do this.
Lesson Learned: Don’t overlook how important budgeting is. A few hours time investment can set you on the right path and be the best return on investment you’ll ever experience for your time.
6. Using Debt to Finance your Lifestyle
It seems like commons sense, but time and time again we hear of people with $10, $20, or $30K+ in credit card debt due to living above their means. If you can’t afford to pay your full bill on a monthly basis, you should not own a credit card. Period. Cut it up. Create a budget, and attack that debt.
And all that purchasing won’t buy you happiness. In many cases, it only further fuels the flighted buzz you get from shopping addiction.
Lesson Learned: You’ll have plenty of time and opportunity down the road to buy stuff you don’t really need. Just wait until you can afford it, if you think it will make you happy. Meanwhile, quit using a credit card and pay off your debt.
7. Buying Too Much Home
The entire financial crisis and recession was caused by one thing: homebuyers buying more home than they could afford. When they couldn’t pay their mortgages, foreclosures were the result, and financial institutions that were seemingly invincible were failing left and right.
Banks made a killing for years in convincing homeowners that they should finance more home than they probably needed. And homebuyers were happy to oblige because they had seen the value of real estate rise for decades without declining.
One of my co-workers used to work at the now defunct Countrywide Financial who said that mortgage underwriters would find any reason possible to give someone the highest mortgage amount they could, versus looking for reasons to not do so.
The reality is that a big, expensive home does not really do anything for your happiness. Low-cost, low-clutter, high-quality tiny homes are the future, and it’s a promising future, indeed.
Lesson Learned: Buy the smallest home you can adjust to, not the biggest home that you’ll anticipate you’ll need 20 years from now when you have 5 kids. Overcommitment to an unnecessarily high mortgage is public enemy #1 in you working your way towards financial freedom.
Honorable Mention: The Extravagant Wedding Day
I’m going to have a hard time convincing most on this, but with the average wedding cost these days over $24,000, an extravagant wedding can absolutely put you in debt for years. I was able to have an awesome cheap wedding for just $2,500 – with a lot of effort.
Why was this just an honorable mention? A lot of the times, dad springs for the bill.
Lesson Learned: Your wedding can be as special as you want it to be, and it doesn’t have to ruin your finances for years.
Financial Blunders Discussion:
- Which of these financial blunders have you committed?
- What other financial blunders would you add to this list?