The 5 Worst Twenty Something Personal Finance Blunders

Sound personal finance is often times not what you DO, but what you DON’T DO. Often times we look for all the right answers, tips, and advice about what we need to be doing to reach our financial goals. If you are able to refrain from doing the following five things, you will be better off than most. Which two have I been guilty of ? Which have you been guilty of? Read on to find out.

The 5 Personal Finance Mistakes you should Avoid

1. Build any sort of non-mortgage or tuition debt (consumer debt)

personal finance mistakesThis one is absolutely killer. I’d estimate that at least half of the personal finance blogs out there these days are focused around the ‘get out of debt’ mantra. Why? Because a whole bunch of people dig themselves deep into debt. Until the recession, the U.S. personal savings rate had dipped into the negatives – meaning that the average person was spending more than they were earning.

Student tuition (within reason) often has a good return on investment. Owning a home can also be advantageous for your personal finances. These are permissible debts, if used wisely. Just about every other type of debt is consumer based. You spent the money because you wanted something. That ‘something’ didn’t bring happiness, so you bought other ‘somethings’. It’s a vicious cycle that never works to your advantage.

2. Wait on saving for retirement

I don’t know how many times I have heard peers say ‘I’m not worried, I have decades to save for retirement’. I personally max out my 401k each year, get a 50% match on it, and I’m still worried. We live in an age without pensions, and the cushy retirements that our grandparents and some of our parents have to look forward to will be extinct when we retire. Start building your own pension RIGHT NOW. You need the compound earnings for decades to outpace inflation and afford yourself a comfortable retirement.

3. Buy vehicles that you can’t truly afford or need

I spent too much on a vehicle. Instead of finding a serviceable $4 or $5k used car, I bought one that was $11k. Even worse, I financed it. A little over a year ago, we sold the car. I felt a little redeemed that I sold it for the same price that I bought it for after two years of use – but still, lesson learned.

In selling the vehicle and taking the bus to work, I have been able to save over $300 per month. I have a friend who now owns two vehicles that were purchased for over $20k – the most recent one because it’s a fast vehicle with a ton of horsepower. He and his wife have a higher income than my wife and I do. They also could bus to work if they chose to. He was absolutely amazed that I was able to max out my 401k. In paying nothing other than maintenance costs for our 2000 Pontiac Grand Am, we are saving roughly $800/month on vehicles – all of which can go towards my 401k.

The bottom line is (and this may hurt) – THAT EXPENSIVE VEHICLE YOU CRAVE FOR IS NOT A RIGHT. If you absolutely need a vehicle, get a serviceable used one that is at least 3-5 years old that you can pay for outright. Anything more is most often a personal finance blunder.

4. Buy more house than you need

The biggest danger in buying more house than you need is that your housing expenses will become disproportionately high in comparison to your other expenses. Experts recommend keeping your housing expenses to less than one-third of your take home income. I’d recommend pushing it lower than that. If you have huge mortgage debt and you or your partner lose their job, you may be in big trouble. Your home is not an investment.

This was a reality for my wife and I earlier in the year when she lost her job. Our expenses were suddenly outpacing our income to the point that I had to cut my 401k contributions to zero. Make your house work for you, not against you.

5. Rush to get an MBA or other graduate degree

I have seen a number of colleagues who are less than two years removed from their undergraduate degree clamor to get their MBA as if it was their pre-scripted destiny. In order for a graduate degree or MBA to make sense, I truly believe a few things need to happen first:

  • You have at least 5 years of experience related to the field that you want to advance your career in. Don’t add insane tuition debt if you don’t even know that you’ll like the job that your degree may bring. If you don’t know, don’t do it.
  • Do a cost/benefit analysis. Ask yourself how many years and at what salary it would take to pay this degree off. Factor in the income that you’ll be losing for the years that you’ll be back in school. I’ve done this calculation and estimate that it would take me at least 10 years with an additional $20k in salary JUST TO BREAK EVEN. If it doesn’t pay off, don’t do it.
  • Ask yourself, better yet – ask potential employers if they would be willing to hire someone with your experience level and an expensive piece of paper at anywhere near the income level you are looking to reach with that expensive piece of paper. If you aren’t getting the answers that you have dreamed about, don’t do it.

Personal Finance Blunder Honorable Mentions:

  • Try to keep up with the Joneses with emerging technologies.
  • Eat out excessively.
  • Wander around for years without finishing your degree or trying to grow your career.
  • Save money instead of first paying off consumer debt.
  • Neglect paying for the right insurance.
  • Choose high fee investments.

Personal Finance Mistakes:

  • What personal finance blunders are you guilty of?
  • How have you fixed a personal finance mistake?

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