Talk to any financial planner or even just have a sit-down with your friend’s dad who’s rolling in the dough, and they’ll all tell you the same thing: “What you do with your money in your 20s can either make or break your financial future.” You can either set yourself up for a life of laying back and relaxing on a stack of cash or you can make some serious mistakes and never end up retiring as long as you live. Scary.
Luckily, we here at Ideal are going to help you out. And you can thank us when you’re old and grey because I’m about to tell you about a couple of mistakes that people in their 20s make all the time. And, hopefully, you’ll be able to identify them and avoid them and keep all your hard-earned money right where it belongs: in your pocket. These are the money traps to avoid in your 20s! Let’s go!
#1: Buying a New Car – Hot Wheels Burn Money
This first money trap is one that I can personally understand falling into very easily. And it involves one of my personal favorite pastimes: driving! So, you want to feel like a boss on the road, get that flashy new car that’s going to turn heads as you roll by, and impress all the ladies with the fact that you can afford the newest Bimmer, Benz, or Bentley. I get it, I really do.
The car you drive is a way of expressing yourself and making a statement to the world. But the sad truth is that buying a new car is one of the worst financial decisions you can make. And that’s because of a little thing called depreciation. In the first year after you buy a new car, it’s going to lose 20% to 30% of its value. So, if you bought a $100,000 car, that’s a whole $30,000 basically down the drain. After five years? Yeah, that depreciation is going to balloon all the way up to 60%, which is a massive chunk of change!
While having a nice ride is a ticket to freedom in that you can travel wherever you want stress-free, it might just put unnecessary strain on your wallet and keep you in financial slavery for the rest of your days. So, am I suggesting that you just never buy a car at all? Hell no! I’m saying you shouldn’t buy a new car. Instead, check out our Ideal Cars YouTube channel or take our Ideal Car Strategies course online and learn all of the best tips and tricks for buying used cars!
Unlike with a new car that’s going to drop 60% of its value in five years, you could buy a used car and actually flip it for a profit in five years if you follow our buying strategies. Yeah, I’m not even joking. I bought a freakin’ Audi R8 supercar and I plan to sell it off in a few years at no loss whatsoever!
So, when it comes down to it, buying a new car is just not worth all that money you’re going to lose, especially when there are so many great used rides out there that need a home. Speaking of a home, that’s a good investment in your future assets as well as a happy future with the ones you love, whereas a wedding is just one day.
#2: Blowing Your Savings on a Wedding – Holy Matrimony, Hole in Your Pocket
Now, a lot of people get married in their 20s or at least start saving for marriage while they’re working through those years. And here at Ideal, we say, “Let love live, baby!” However, the average cost of a wedding in 2019 was around $28,000! In 2020, the average cost dropped to just $19,000, but there was that whole COVID thing that really threw off the wedding industry. So, yeah, 2020 doesn’t count.
Anyway, $28,000 is a ton of money to blow in a single day. And yeah, it’s your wedding and you want it to be special. But what’s going to make you happier in the long run: ensuring a stable financial future for you and your spouse and any kids you might be planning to have or having gold-embossed letters on your wedding invitation?
So, if you’re looking to get married, make sure you make it a day you’ll never forget, but also consider dialing back the extravagance and maybe saving some of that money for the future, especially if your bank account is already low on savings.
You know when you shouldn’t even consider blowing a ton of money on a wedding or anything else for that matter? If you’re up to your neck in debt, which, unfortunately, a ton of people are after their 20s.
#3: Getting Into Debt – Digging a Hole for Your 30s
Nowadays, there are more ways to get yourself into debt than I can even count. You can run up your credit card bill, you can get behind on your student loans, or you can get an auto loan that takes you years to pay off. Not to mention, if you start going down the payday loan route and buying stuff you don’t need, you can end up in some serious debt.
Plenty of people in their 20s end up falling into these traps and waking up at age 30 with a ton of debt racked up! No one wants to spend the rest of their life as a slave to the credit card company. Take the necessary steps to make sure you never get in debt.
And, if you’re already in debt, make a precise plan to get yourself out! For a lot of people, taking on student debt is a great way to better themselves and get a valuable education. But, if you don’t manage your debt after school, it can become more hurtful than helpful.
So what do you do? Budget out your monthly income! Make sure that a certain amount of your cash is going directly to your loan repayments every single month. Hell, you can even set up automatic payments to make it easier on yourself. When it comes to credit card debt, make sure you never spend more than you have in your checking account and avoid letting your balance grow out of control by paying it off weekly.
If you’re already under a mountain of credit card debt, do the same thing as you would for student loan debt. Start budgeting your money every month and make sure that you’re paying off some of that debt every month. The same thing goes with auto loans or any other kind of debt you may have gotten yourself into.
Trust me, when you hit age 30, you want your money to be all yours and you don’t want any debt company to have a claim on your life. Take the necessary steps when you’re in your 20s and live debt-free the rest of your life!
The longer you’re in debt, the more interest you’re going to have to pay. So get out of debt as quickly as possible. But, once you’re debt-free, you should start making that interest work for you by investing your money instead of just sitting on it!
#4: Not Investing Your Money – Save No to Idle Cash
If you don’t have some of your savings in investments right now, you’re missing out on a valuable opportunity to make that money work for you. This is the main difference between poor people and rich people. Rich people know that money can be a tool to earn passive income. The more money you put into investments, the more passive income you can earn by just letting your money sit there!
Think about this: if you’re holding your money in a normal savings account, you’re probably earning like 0.06% interest on it. Whereas if you put that money into an S&P 500 index fund, you’d be looking at about 10% return, which is what the S&P has averaged since it was created in the 1920s.
I don’t need to tell you how big of a difference 0.06% and 10% is, but just for the sake of illustration, let’s do a little example. If you put just $1,000 dollars into a savings account with that 0.06% return and let it sit there for 10 years, you’ll earn a whole $6.02 in that 10 years. Now, if you put that same $1,000 into an S&P500 index fund that got a 10% return over each of those 10 years, you’d have earned a whole $1,593.74. You see? Just by putting your money into one of the most stable investments out there, you earned over $1,500 dollars!
That’s the power of compound interest and the reason you need to start investing, and start investing now! If you want some more ideas for places that you can start investing your money at a young age, check out our video about getting started in investing as a student!
So, yeah, you should be putting your money into high-interest-earning securities. But what exactly should you be saving for? And when do you know when you should start spending? Well, before you go buying up million-dollar mansions and Bugatti Veyrons, make sure you have a retirement fund and an emergency fund.
#5: Not Having a Retirement and Emergency Fund – Setting Yourself Up for the Future
Alright, let me be very clear about something: the very first thing you should do with your savings is establish an emergency fund. Period. You need to set aside a certain amount of your money if you can in case something goes wrong in your life and you’re no longer able to generate income or you get slapped with a huge unforeseen expense. Maybe you get laid off, maybe you or a loved one gets in an accident and suddenly you have to front a huge medical bill, or maybe some massive company sues the pants off of you because you tweeted something bad about their product. I don’t know, these things happen. And if you don’t have some stay-afloat money saved away, you could be looking at a life of debt from there on out.
Your emergency fund should be about 3 to 6 months of your total living expenses. So, if you know that you spend $3,000 a month on all your expenses, you should be saving between $9,000 and $18,000 in an emergency fund, and probably even a little more just to be safe.
Once you’ve saved up that much, it’s time to start saving up for retirement. You can do this with an employer-sponsored 401(k) or a private retirement fund like an IRA. I’d recommend having both, but whatever you choose to do, you should set a dollar-amount goal for how much you want to save and keep on contributing to those retirement funds until you reach that goal.
Set an age that you plan to retire at. Let’s say it’s 60. Then, and this is a little dark, but how much longer after 60 years old are you expecting to live? Most financial advisors recommend planning that you’ll live until 90. So, that’s 30 years you need to budget for. What do you expect your living expenses to be each year? Where do you want to live during retirement? How much will you be paying in taxes? Is having your own boat an absolute necessity when you’re an old fart? These are all questions that you need to consider and set your financial goal accordingly.
Once you’ve made enough money to cover your emergency fund and your retirement fund, then you can go ahead and start making some more speculative investments and trying to hit it big. But, to be safe, you should make absolutely sure that you’re covered in case of an emergency and that you won’t have to work until the day you die. And that preparation all starts in your 20s. So, get on it!