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?
Great post!!! I say this as both a financial planner and the parent of three young adults (ages 17, 20, 22). My oldest graduated college in 2010 and has a great job. Thankfully she is also the poster child on doing things right financially. As far as the student debt issue we just had this conversation with our youngest and he factored this into his final choice of colleges for this fall.
It’s crazy that more people don’t follow these basic principles of finance. People think that they will be happier with more stuff when in fact it is the exact opposite.
Personally, I sleep way better in my little townhome that me and my wife can comfortably afford than I would in a fancy expensive house with mortgage payments that would cause more stress than it’s worth.
I think it is hard to prioritize with both wants and needs. Do you push off saving/investing for retirement and pay off your student loans or pay student loans for 10-30 years and save for retirement. I think many young adults have to make choices that young adults before did not. Though, I do agree with the car, house, lack of budget and using debt as a way to finance a lifestyle as major problems. Part of reason why young adults may not understand the need not to have debt, is they lived on student loans for four to five years while in school, it is a hard switch to make.
I agree with most of what you say, and yes student loan debt is getting out of hand. However, too many people are touting school as less important than what it is. Sure college isnt for everyone, but a college education isnt necessarily important because of the value you place on it, rather because of the value that employers place on it…for whatever reason they have. MBA’s are becoming as common now as BBA’s were 20 years ago. Getting your degree is important in the health, finance, accounting, marketing, logistics, IT, and supply chain fields…just to name a few! Id like to see more people discussing the importance of the education, and how to be do in the most cost effective manner.
I agree with you that a college education is very important, but people should compare the cost of that education with their approximate earning power shortly after they graduate. Too many college-goers pick their school based on where there friends are going and what sounds cool instead of looking at what they can afford (with savings, scholarships, work-study programs, etc.).
I went to Texas State University, a public school about 30 mins away from The University of Texas. It’s often refereed to as the step-child of UT, however I know that I am much better off than many of my friends who went to UT, accumulated a bunch of debt, and have had the same luck in the job market as me with our similar degrees.
College is important, but planning how you pay for it is more important in my opinion.
That’s true. There are certain professions out there that pay as much for an associates degree grad as they would for a bachelor’s, as another example. But we’ve been trained to look down upon community college degrees and many opt for the more expensive university degree just because the option is available to them (with the debt that comes with it).
I disagree about the school not making a difference. The good thing about the bigger, more well known schools is that it’s a big plus for networking. Though I believe that a school’s academic reputation is even more important.
I didn’t go to the bigger, more popular school in the state that all my friends went to. I instead went to a smaller school, because for my major it was clearly a better program and academically overall (top 5 engineering school).
Career wise that was probably the best thing I did. I’ve had doors open just because I graduated from that school because it has a stellar reputation. Sure, the hard work and successes I have had in my career got me to where I am. It was the school and its rigorous program that gave me the foundation and work ethic to be successful. In some ways work has never been as hard as college….
Also it was a public school so it didn’t cost that much. It was less than 25k and it took me 5 years to get out about 10 years ago.
As a non manager with only a B.S.; I’m earning over 120k in an inexpensive city and pretty happy with that. I might go for my MBA eventually if I decide I want to go the management route but in no big hurry.
I think this statistic merits mention. I read a few months ago (May?) that while unemployment was 9.5%, if you had a 4-year degree it was below 5%. That definitely caught my attention.
Still, people in this country still take on massive debt loads for “love degrees” ie liberal arts educations that cannot produce a job upon graduation. And then people say they wouldn’t trade their “undergraduate experience” for anything. It’s sort of like 4+ years of very expensive summer camp.
Math and science degrees produce jobs. Nurses can’t be outsourced with a phone call to Calcutta. But 18-year-olds don’t think about that during the application process, either because they don’t know to think about it or because they aren’t the ones paying for their choices.
I heard someone say that you live the life that is the sum of your choices. I firmly believe that. I worked through college and paid the bills. I chose to pay tuition over buying groceries at times. But I didn’t ask anyone else to shoulder the responsibility for my decisions. Education is becoming increasingly more expensive and that choice has to be weighed carefully, ie does this field produce jobs or am I getting a degree because I don’t know what else to do.
Think about this story:
The nursing shortage is a myth, and has been for years. I graduated in May 2008, and it took 10 months to find my first job. Some of my classmates were unemployed for a year after graduation. More recent graduates hacve an even harder time, especially of you’re an LPN/LVN (as opposed to an RN) or you have less than a Bachelor’s degree.
I enjoy reading a lot of your posts but I’m getting kind of sick (to the point of getting ready to unsubscribe) of constantly saying paying for education is a waste of money. I am a physician and have loads of medical school debt that I am chipping away at (I’m about to break the $120K mark!), I’m underpaid (not relatively underpaid, actually underpaid), and I’m overworked. But it’s my dream job, I am able to live comfortably and within my means (we live off part of my husband’s paycheck and save and pay down student debt with the rest and all of mine), and it’s not all about the bottom line. Educated individuals are important and I feel that you constantly undervalue this because of your specific career that you chose and feel it could be done with college or advanced degrees. Fine. I get it. But without people willing to sacrifice the bottom line (and lots of other aspects of their personal lives) we wouldn’t have doctors…or plenty of other important people in our lives. So give it a rest.
Education is not a waste of money. Quite the contrary. In this post I highlight that you should:
1. Move forward and don’t sit around and continue going to school if you’re unsure what you want to do.
2. Fight student debt as much as possible in responsible ways (not going to school is not one of them).
In previous posts I’ve highlighted that master’s degrees or higher earn 20% more than bachelor’s. Education can have a very high ROI when used effectively.
You went to med school, have applied your education, and enjoy your job. You have not done anything that I’ve advocated against, so I’m not sure where the venom is coming from. Perhaps just a misunderstanding of what I’m advocating? (go to school with a purpose, aggressively avoid and pay down debt, and don’t overlook opportunities to get paid well for a lesser degree)
I wanted to comment on the last point… the wedding day. You won’t have a hard time convincing a man to spend less on it. You’ll have to work on the woman who’s been dreaming about it since she’s been 13 years old.
So I hear the wedding day is for the woman and the honeymoon is for the man, and yet the disparity on spending for those occasions are way off.
That’s a great point, Ron. It can be tough to overcome fantasies planted for a decade or more. I didn’t have to battle too hard and I’d never envy anyone who does.
Great post. Most young people do not prefer to save for their retirement till they start thinking about it (After age 40). Its important to save properly and starting to save early can help you either retire early or retire with more money (or assets).
as student you must try to be debt free (except education loan. if you have debt your chances of following your dream jobs or dream career goes down as debt goes up.
I think the problem with many students who aren’t sure what they want to do, make the mistake of not at least getting a degree in something practical like accounting, engineering, etc. Even if it’s not something you like it would increase the chance at a decent job. Alot better than a degree in something like Art History, Sociology, etc(unless you plan to go into research, academia; but then you need to get your doctorates).
Sure it’s nice to love and have passion for what you do, but I think that’s overrated. My job is just the means to financially support my life and get me to the point so I can retire.
I’ll admit that I do enjoy what I do (IT) and I get paid pretty well for it. Even if I get bored/hate my job in the future I’ll still keep doing it as it’s my best means to make my financial goals.
All valid points. I’d have to say that waiting too long to establish a savings plan or a budget is the worst thing a young adult can do. Start early!
I love your post and I agree with all the points except point#3 — it is my personal experience that employers are not exactly willing to let you try your skill at something. A degree is an prerequisite for most of the worthwhile jobs these days. I would definitely suggest that students take up as many internship opportunities as possible while they are in college.
There’s some fuzzy math going in with #1…
$5k/yr invested at 11% over 20 years gets you ~$360k
$10k invested at 11% over 37 years gets you ~$5.2M
OK, I get it, the numbers might not have been intended to be exact, BUT “In other words, waiting 10 years leaves you with less earnings despite investing almost twice as long and twice as much.”
The general “don’t wait” lesson is very true, but if you invest twice as much and leave it in almost twice as long you’re going to have more. In fact in this example, the principle alone for the “procrastinator” is more than the total for the “$5k over 20yrs” person ($370k vs $360k).