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“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
Charlie Munger
This is some of the best advice. If you can consistently avoid making huge mistakes, you should come out way ahead in life. Bad financial decisions can haunt people for years. So in this vein, I thought I’d share the top 14 worst money mistakes that you should try your best to avoid.
Playing It Too Safe When Investing
In your 20s, you should invest in stocks. Whether that is a passive index fund, like the S&P 500, or individual stocks, the stock market is where your money should be. Unfortunately, statistics have shown that too few millennials invest in the stock market. According to a Bankrate survey, just over 25% of 20-somethings invest in the stock market. That means that 75% either invest in bonds or worse, do not invest at all.
In your 30s, you should have plenty of time to deal with the volatility of the market before you reach retirement. Over time, the S&P 500 has had an annualized return of over 10%. That definitely beats the 4% return of bonds. Meanwhile gold has performed even worse averaging just under 2%.
While you may wish to diversify, in your 30s, holding more stocks is the wisest position. Wealthfront and Betterment do an excellent job of adjusting your portfolio over time, if you’re looking for a robo advisor to assist in the creation of your portfolio.
Related article: The Benefits of the S&P 500
Saving in the Wrong Places
A friend of mine has been saving for a downpayment on his home for over 10 years now. You may be thinking– that’s great. They are saving in order to avoid PMI. Normally, I would agree with this sentiment.
However, over the years, my friend decided to save this money in an online bank account instead of investing it in the stock market. He was convinced that he would be able to snatch up a foreclosure at a great deal, so he wanted to stay liquid in cash.
The problem is that it has been 10 years. He still hasn’t pulled the trigger on a house. Every time he gets close, he gets cold feet.
In the meantime, the stock market has doubled, even though the top of the market was back in 2007. So while I think it is a great idea to avoid PMI, you should also have a strategic savings plan in place.
Prioritizing Your Child’s Education over Your Retirement
One of the best pieces of financial advice is that your kids can take out loans for college, but you cannot take out loans for retirement. While I understand the desire to provide for your child’s future educational expenses, you should not do so at the detriment of your own retirement.
The priority should be your retirement in your 30s. You should take advantage of your employer’s 401(k) plan, especially if they offer a match. You should also take advantage of other tax-deferred accounts, such as the Roth or Traditional IRA.
Once you are on the right path with retirement, then you can start funding your child’s educational needs.
Being Underinsured
While we may not want to think about potential problematic situations, we still need to plan for them. Whether it is life insurance or disability insurance, you need to consider unfortunate events that could occur in the future.
Many people forego certain insurances because of cost. Just think about how costly it will be if life does not go according to plan and something terrible happens to you.
You may receive some insurance through your employer. However, by the time you reach your 40s and 50s, those coverages may not be applicable anymore. That is why it is important to obtain the proper insurances in your 30s to lock in for the future.
Related article: A Comprehensive Guide to Your Insurance Needs
Failing to Talk about Money before You Get married
Recently, my wife and I joined a marriage ministry at our church. The other week, I spoke on finances in a marriage prep class for engaged couples.
The first question that I asked the couples was if they knew how much money their future spouse made. Most of them answered that they had a general idea of the figure but weren’t exactly sure.
Not off to a good start.
The second question I asked was if they knew how much debt their future spouse would bring into the marriage. Some people really had no idea.
Again, not off to a good start.
It is vital to be completely transparent about finances before marriage. Don’t you know that the most prevalent source of stress within a marriage is due to money matters? Trust me- nobody wants a debt-related surprise the day after the wedding.
Spending Too Much Money on Your Wedding
According to The Knot, the average wedding in the US costs over $35,000. That is a record high in the US. Yes, it is a special day, and it should be memorable. But at what cost to your future?
Most of the time, the specific minor details (e.g. wedding invitations), which can still be costly, aren’t even very memorable to the bride and groom afterwards. Determine the elements that are really important to you, and then find ways to cut costs in the other areas.
Don’t let one day’s expenses to hinder you from achieving your financial goals in the future. While it is a once-in-a-lifetime event, you should also consider life afterwards as well.
Giving Your First Kid the Best of Everything
New parents want to get their kiddos the best of everything. That could be dads seeking out the newest Yeezy’s for their kids or moms dressing their daughters up like Cinderella.
While my wife wants my son to look nice, she has found ways to do so without breaking the bank. We are huge proponents of buying children’s clothes and toys from thrift or consignment stores.
We have found kid’s clothes with the tags still on them, shoes that look like they’ve never been worn, and even toys still in boxes.
Related article: Saving Money When You Have A Baby
Spending Too Much on Cars
Just because you may have driven a beat up, older car in your 20s doesn’t necessarily mean you should upgrade just because you are in your 30s and making more money.
Today, car owners in their 30s and 40s have the highest level of car debt. They owe nearly $14,000 on average, according to the Housing Finance Policy Center.
As most of you know, vehicles are depreciating assets that drop each year.
By how much do these depreciating assets drop?
On average, a new car loses 19% of its original value after the first year.
After 2 years… it drops by 31%.
After 3 years… it drops by 42%.
After 4 years… it drops by 51%.
After 5 years… it drops by 60%
How would you feel losing 60% on an investment?
That’s why instead, I am a big proponent for buying used vehicles in their 5th year. By that time, a lot of the depreciation has taken effect. You can still receive a high quality car while saving a substantial money, allowing you to invest the rest.
Related article: The Best Tips for Buying a Used Car
Going to Grad School without a Good Reason
A lot of my friends are thinking about going to grad school. The problem is that many of them are unsure as to why they should go. Most of the time, they are convinced that it will open up doors.
When I went to grad school, I thought the same thing. I figured that it would allow me to market myself better and that it would grant me connections. Now, five years later, I still work the same industry as when I received my MBA, and I have yet to market myself with my degree.
Unfortunately, since I didn’t have a plan, I wasn’t able to leverage grad school for all that it could have been. Therefore, I probably wasted some money in the process. Personally, I think I would have been better off investing the money instead of paying for grad school tuition.
Bottom line: If you enroll in grad school, have a concrete plan in place for the future. Not something vague, as in my case.
Assume You’re Going to Make More Money in the Future
Some people forego saving when they are younger because they believe they will reach their peak earning in their 40s and 50s. Why save now when you can save in the future?
Unfortunately, it takes quite a few years of savings to become a millionaire. There is real power in compound interest. While it’s never too late to start saving, it’s much easier to save for retirement earlier than later in life.
Invest Too Conservatively
It drives me crazy when I see people at work investing 100% of their retirement in the G Fund, which is the equivalent to short-term treasuries. The G Fund’s one-year return is 1.83%, which is not much higher than the 1.30% return of my Ally savings account.
Over the past 10 years, the G Fund has returned 2.63%. In contrast, the S&P 500, which peaked in 2007, has doubled its return. That includes the volatility of the Great Recession, when stocks lost nearly 50% of their value.
When I ask people why they invest so conservatively, they normally shrug and say that they don’t want to deal with the ups and downs of the market.
While the volatility of the market can be tough to watch at times, the contrast is that it will be much more difficult to achieve retirement if you are only receiving 2% returns on your investments each year.
Personally, I’d rather take on a little bit of risk to receive greater rewards in the future.
Accumulating Debt to Fund Your Lifestyle
Debt can be a great tool for building wealth, especially if you are utilizing student loans or a mortgage to buy a house. On the flip side, debt can be a double-edged sword as credit card debt can quickly derail your retirement dreams.
The average credit card balance of those in debt is nearly $17,000. If you make the monthly minimum payment, it would still take you 15 years to pay off that debt. In actuality, you would be paying double for the items that you purchased via credit card. You have to ask yourself if the items you are purchasing today are really worth double their price in the future.
Buying a House You Can’t Afford
Buying a home is a big step, and you need understand that you will potentially lose some flexibility in the future. For instance, I have a friend that bought a nice house, but over time, his job started to wear on him. He decided that he wanted to start over and transition to another industry.
Unfortunately, when he bought his home, it was at the top of the housing market. He was nearly $200,000 underwater on his house. Due to that circumstance, he simply couldn’t take a pay cut and delve into another field. Unfortunately, his dream died right then and there, all because he lived in a house that he really couldn’t afford.
Keeping Up with the Kardashians
Full disclosure: I’ve never seen an episode of the show. But, I know some people who are obsessed with them. The obsession moves towards trying to emulate them, whether that is buying their cosmetics or clothing. Purchasing all of their merchandise costs major bucks. In the long-term, is this craze really worth it? Fads vary so drastically year by year.
I think Will Smith said it best:
“Too many people are buying things they can’t afford, with money that they don’t have… to impress people that they don’t like!”
Comparison is the thief of joy. Stop comparing yourself to your peers and be thankful for the blessings that you have, as little or as big as they may be.
The car one and the grad school one though both in my 20s. Ultimately grad school was paid for by a former employer so no big loss, but I don’t see that the degree opened any real doors.
FULLTIMEFINANCE recently posted…Defining the Upper Limits of Middle Class
Likewise!!! I didn’t see any huge doors open once I got my MBA which is unfortunate because I was convinced it would 🙂
I am a graduate school teacher and although I think education is important, I see many students who are getting their MBA or MS without much of a plan in mind. Admission standards have been lowered to attract students, courses and programs have been watered down to the point where if you show up to class and do the bare minimum, you will get an A. It is a disservice to both the student and potential employer. It’s so important to have goals for your education and then maximize the value, but I see many students who do neither and pay a high monetary cost to do it. Tom
Tom @ Dividends Diversify recently posted…Surviving The 2002 -2007 Bull Market Hangover (Part 2)
I definitely agree!!! I saw too many people that basically paid for degrees and left without acquiring any skillsets to help them out in the real world.
I would add to the list not committing to advancing your career to the list. Your 20s, especially before you have a family, is the time to put in the extra hours to either advance yourself so you are earning more sooner or save for financial independence. Doubling down on making money is possible at all ages, but it is easier when you don’t have other life responsibilities.
Great point Chelsea!!! I definitely didn’t push myself and put in the extra hours in my 20s. I’m finding that I need to do that much more in my 30s which is not what I want to be doing with two kiddos at home.
One mistake that I made earlier in my 20s was taking too much risk. I used to double down on some stocks that went down or investing in unproven companies because of talking heads on TV. It was a hug lesson for me to learn. However, I am glad that I learned it earlier and had the opportunity to fix it earlier too.
That was an expensive lesson, but it was affordable because I was young.
Leo T. Ly @ isaved5k.com recently posted…The Best Holiday Gifts To Give Yourself
Thanks for sharing Leo!!! Some of my worst lessons are ones that cost me financially. It’s easy to get overconfident and the best way of being humbled is when it hurts your wallet.
Didn’t see anything you missed. Unfortunately for me, I found too many on that list we did or almost did. We have course correct and have skipped some of those pitfalls entirely.
Having found the FI path now I worry I’m being too optimistic with our projections to our FI date.
Budget On a Stick recently posted…Slow Cooker Tamales
Keep on the financial path. Sounds like you’re well on your way!!! Keep up the awesome work
I wish I didn’t spend as much on my wedding as I did. Sometimes other people have more fun than you do. At that time we wanted the best of the best in terms of outfits, decorations, venue, etc. but didn’t realize how temporary it all is.
SMM recently posted…A Customized Budget Is A Good Thing
Our wedding flew on by. I didn’t even get to eat my whole meal. I definitely wouldn’t spend what we did and it was cheap by comparison to some of our friends 🙂
That is a fantastic list. I love the tip about buying your kids clothes used. That has been a big expense for us that has kind of flown under the rader as just 20 bucks here and there but it adds up quick.
I would also add having kids when your marriage sucks. I have personally had two friends who were horribly unsatisfied in their marriage only to end up having kids the next year.
Grant @ Life Prep Couple recently posted…What To Do If Your 401K Plan Sucks
Oh man I can’t imagine bringing in kiddos if your marriage isn’t going well. Children shouldn’t be exposed to a toxic relationship. Great point!!!
“Giving Your First Kid the Best of Everything”…. I totally agree with that. Not only are you wasting money, but you’re giving them a very bad perspective on value and spending.
“Assume You’re Going to Make More Money in the Future”… the second order problem here is that when you make and spend more money, you’ll expect to maintain that lifestyle into retirement… requiring even more funding.
Thanks for sharing Mikes!!! I totally agree lifestyle inflation is very real and I think that’s part of the reason society’s retirement savings is so poor.
All excellent advice. I would also add not saving enough. If I could back to my 30s I would definitely try to squeeze more out of income for investments. I would’ve been smarter and in a better position than I am today.
Jason recently posted…Wineries, Wineries, and More Wineries
Great point Jason!!! Do everything you can to squeeze out a couple of extra dollars each month is huge in the long run. I tell myself every time I drive by McDonalds that I don’t really need the McFlurry, even though I want it 🙂
The only one I would add is “not keeping track of your expenses”. I was doing it at a high level but that is not good enough if you want to save. It would have made my journey to FI much shorter.
Caroline recently posted…Why You Shouldn’t Be Too Nice To Your Tenants
Great point Caroline!!! Keeping track of your expenses is huge 🙂 Thanks for sharing!!!
I have done many of these while growing up. It is funny looking at some of these and having a “DUH” moment. I think the Keeping up with Joneses, weddings, and vehicles are the big ones, but some of the others can add up fast!
FIbythecommonguy recently posted…DIY Toilet Install
Thanks for stopping by!!! I definitely agree that the big ones will get you in trouble but the small ones seem to add up quick 🙂
Nice post. All valid points. My mistake was not saving and investing. I wish I started investing & saving at 22. I finally started at 35. Better late than never.
dividendgeek recently posted…10-Year Dividend Growers with dividend increase (Dec 04 – Dec 08)
I definitely agree it’s never too late to start investing 🙂 I was fortunate that I started investing in my 20s although very small amounts. I wish I had invested way more in hindsight 🙂
My biggest mistake was not finding a side gig that I enjoyed or earning more money outside my day job (That probably would’ve earned me more money to invest). I only thought about working at an office and getting promoted to make more. My thinking was very limited to a “day job.” Another mistake is not reading into personal finance sooner to realize that financial freedom/independence is possible. This would’ve been solid advice for my 22-year old self. Better now than never hah!
fin$avvy panda @ finsavvypanda.com recently posted…Fail-Proof Ways to Pay Off Our Debt in 2018
Hahaha…like you I didn’t even think of side gigs back in the day. I wonder how much further I’d be if I had taken the plunge when it first crossed my mind 🙂
I have struggled a bit with point #3 – balancing saving for the kids future post-secondary and saving for retirement. Also, good point on going to grad school! I have two grad degrees and I have to say they really have not impacted my earnings per se. Although, the degrees look great on my study wall! lol
Enoch@SavvyNewCanadians recently posted…TFSA Annual Limit, Contribution Room, and Penalties for 2018
Hahhaah…I have to be honest and say I have no idea where my MBA degree is. Hopefully Mrs. MSM has it hidden somewhere safe. Like you it hasn’t seemed to help that much 🙁
Great advice MSM! As someone who used to work for the insurance industry, I can’t emphasize enough the point of not being underinsured. Going through a catastrophe and not having enough insurance can double the pain.
I would advise people to go as far as to buy a good umbrella policy. A few hundred dollars can buy millions in coverage!
Thanks for sharing Miguel!!! I too use to work in the insurance industry and it was devastating when people didn’t have the right coverages. I am now a zealot when it comes to telling friends and family to get the right coverages.
When I wiped off my student loans, I started to build up my money through savings and CDs. But from what I know now, that was a mistake because of the potential to invest at that time. I could have more capital today if I had the knowledge to put money in the market. At least I know now.
Kris recently posted…Expense Chronicles November 2017 – Car Registration and the Steam Train
I think prioritizing children’s education funds over retirement is a big one. Most of my friends in their 30s are focused on that but barely have much saved for retirement. Definitely something to focus on.
Thanks for stopping by Alanna!!! I definitely agree too many people neglect their own retirement trying to get their children ahead, which will potentially hurt them in the long run.
At 28, the most common mistake I see is friends going to grad school. It seems like people who aren’t totally satisfied with their career and salary think paying $60k+ for another degree will solve their problems. I haven’t seen any friend that completed their MBA make any significant increase in pay afterwards. Yes, in the long term over the span of a whole career it may help but it seems too big of a risk for me. I have found that certifications are worth way more in the job field than a general degree. I recently passed my PMP (project management) exam and applied for a new job and got about a 21% increase in pay. The exam was about $500 and time spent studying. Can’t argue with that ROI! I even beat out another applicant who had his MBA.
Laine recently posted…Christmas Tree, Oh Christmas Tree
Congrats on passing the PMP!!! That’s a huge exam to pass. I definitely agree that having a PMP is a stand out characteristic. I definitely appreciate the training that I have even though I’m not a PMP, those classes are have been invaluable in some of the projects that I’ve done at work. I would much rather spend $500 on PMP classes and tests than $60k+ on an MBA 🙂
Thank you!! i agree, the knowledge has been huge to have and so directly applicable to work. $500 I will certainly not regret spending 🙂
Laine recently posted…Christmas Tree, Oh Christmas Tree
This is such great, comprehensive advice! I will be pinning this to share with others and definitely taking your advice to heart. Thank you so much for sharing!
Rae | Mindful Rambles
I’m glad you liked it 🙂
Yeah….I agree with playing it too safe with investments. I’m forty-five and regretting my lack of involvement with investing. Great tips!
Glad you like the article Kim!!! I definitely try to share with people that your 20s and 30s are times when you can be more aggressive.
I am 50 years old. I wish I would have read this email 20 years ago! Great ideas.
Hahaha…I wish I read this 20 years ago before I hit my 30s 🙂