There are a lot of things we wish we didn’t do in our twenties. Like blowing all our rent money on a night out or working our butts off with not even a cent to show for it.
Whatever it was that we did, YOU don’t need to make those mistakes. Here are some financial mistakes we wish we didn’t do in our twenties and how to remedy them, because hindsight, indeed, always has 20-20 vision.
1. NOT HAVING INSURANCE & HEALTHCARE
Most 20 year olds will think of insurance and health care as expenses rather than necessities. Little do they know that these are actually great wealth preservation tools. Emergencies (health or death related) tend to siphon funds intended for other things, ruining whatever budget you have. By purchasing insurance and healthcare, you are able to prepare for whatever life throws your way.
2. WAITING UNTIL LATER TO START INVESTING (NOT TAKING ADVANTAGE OF COMPOUND INTEREST)
When it comes to investments, the younger you start the better. This is because of compound interest which can be thought of as interest on interest. Unlike simple interest wherein there is interest based on the principal amount ONLY, compound interests calculate interests based on the principal amount plus the interests the principal amount has gained over the years.
Starting later in life will mean that in order to achieve the growth in investment of those who started earlier you would have to invest larger principal amounts. Let us illustrate:
At 20 years old, Bill decides to make a one-time payment investment of $10,000. He decides to put this amount in a mutual fund. Assuming a conservative growth rate of about 4% per annum, the $10,000 Bill invested at 20 years old will grow to become $58,412 by the time he is 65. In comparison, had Bill waited to invest that money until he was 30 years old, the $10,000 principal amount would only grow up to $39,461 at 4% interest per annum by the time Bill is 65.
3. THINKING YOU NEED BIG BUCKS TO MANAGE YOUR MONEY
One of the best ways to create wealth and avoid financial stress, no matter what pay grade you are in, is to create good financial habits. A great way to start good habits is by creating a budget. A budget that places priority on setting aside money for investments and emergencies, covering your necessities with a little bit left over for buying small luxuries. Here is a good example of a simple monthly budget adapted from T. Harv Eker, author of New York Times bestseller “Secrets of the Millionaire Mind”.
- NECESSITIES (50%): For bills and everyday expenses. Putting a limit to the money you are allowed to spend every month either encourages a lean existence or drives you to earn more.
- FINANCIAL FREEDOM ACCOUNT (10%): For developing investments and creating passive sources of income.
- LONG TERM SAVINGS FOR SPENDING ACCOUNT (10%): This money can be further broken down into savings for a car, or a house, the kids’ college fund or a vacation in the Bahamas.
- EDUCATION ACCOUNT (10%): T. Harv Eker believes in investing in furthering our financial IQs and skill sets as a way of creating more financial wealth in our lives and having the mindset that allows us to hold on to that wealth. Spend money on courses, books, seminars and conferences that will encourage growth in your career.
- GIFT (10%): One of the more unconventional pieces of advice from T. Harv Eker is to give money to receive money. He says that giving money allows us to live in a mindset of abundance. A mindset that for him has created more wealth in his life than any of his other principles put together.
- PLAY (10%): This account is meant for blowing on luxuries, things that you don’t really need but make you feel good and abundant.
4. SPENDING ON THINGS THAT MAKE YOU EVEN POORER
Most budgets of 20-somethings look like this: Pay bills, spend whatever’s left over. Which is great for acquiring things, not so much for acquiring wealth. Most people never hesitate to buy things that make them poorer (house, cars, gadgets, clothes, designer bags), but dilly dally when it comes to purchases that could improve their net worth (investments, rental real estate, etc.). As early as now, make a decision to buy less of the things that take money out of your pocket and focus your energy and money on things that can actually create income for you.
5. NOT LOOKING AT YOUR COLLEGE DEGREE AS AN INVESTMENT
College degrees cost an average of $38,000 a year or a total of $152,000 for a four-year degree. That’s a sizeable amount of money to lose on a degree that doesn’t provide a sound return in investment. One big mistake of young people is getting a degree based on passion alone. Passion is well and good but it is better to consider degrees that offer the highest rate of return (usually engineering and math degrees). Another option is lowering your cost of education while getting the degree you want, like going to community college for example.
6. HEAVY CREDIT CARD USAGE
Fresh out of college and already in so much debt from student loans, 20-somethings should avoid further debts like the plague. The easiest way to get into debt is through heavy credit card usage. Buying things with plastic can make you overestimate the actual amount of cash you have, buying things you don’t need with money you don’t actually have right now. Avoid getting into serious debt by using cash as much as possible and paying off your credit card bills each month, if you can’t really avoid using it.