Money Mistakes to Avoid in Your 20s

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This is the digital nomad quest podcast with Sharon Tseung. teaching people how to build passive income, become financially free and design their best lives.

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Hey guys, Sharon from digital nomad quest, and today we’re gonna go over 10 money mistakes to avoid in your 20s. Now, for many, your 20s, maybe the first time you had to deal with your finances all on your own, it’s the decade where you’re figuring out life and you’re learning from your mistakes. And that’s kind of why I’m making this episode because I want you guys to learn about the money mistakes ahead of time, so that you can create that strong foundation for the future. Because the sooner you start teaching yourself about personal finance, the more your wealth can grow, there have been many people who’ve spoken to me saying, Oh, I wish I learned this stuff earlier. And that’s kind of why I want to make these resources so that you guys can learn sooner than later. Now, if you’re past your 20s, it’s all good. There’s no race or anything like that, I think it’s just important to know these different tips. Now, without further ado, let’s just get right into it. So first off, is not having a financial plan. If you don’t have a financial plan, it’s like walking around aimlessly, not knowing what you’re doing, you’re walking without a goal without a purpose. And after a while, you wouldn’t have accomplished anything. And that’s why it’s important to map everything out and have that destination in mind. Of course, money isn’t everything. So after a certain point, maybe money won’t be the focus. But I think in the beginning, it’s important to create that roadmap and those goals so that you can get yourself to a financially stable place. That way, it creates less worry, and you’re more set for the future. So if you’re going to create this financial plan, you need to know what your monthly income is, and your monthly expenses. You also want to make sure you understand your net worth. If you’re making a lot of money, but you’re spending it all then you’re not putting any of that into savings and investments, which is what’s going to help you grow your wealth and have that financial security. That’s why you should use a tracker like Personal Capital, which I’ll link below because it’ll automatically integrate with your bank accounts. So you can see where your money’s going and how much your net worth actually is. If you don’t want to use Personal Capital, you can also spreadsheet everything, I kind of use a combination of both Personal Capital and spreadsheets so I can have a better overall picture of my finances. One easy guideline that can help you is the 5030 20 rule. Basically, this rule means your monthly after tax income is going to go into three categories. It’s 50%, for needs 3% For once and 20% for savings or clearing debt. Now one disadvantage with this guideline is it doesn’t adjust based off of your goals. So you can kind of tailor it to what you think is best for you. I would say though, that if you’re spending more than 50%, for your needs, you’re gonna need to see how you can reallocate better. For example, maybe you can live with roommates, you can house hack, or live with parents for some time, try to figure out ways where you can reduce that percentage for your needs so that more of that can go into your savings and investments. Housing is usually the biggest portion of your needs, which is why I kind of talked about this, like house hacking and all those different things. But I would also say you might even consider relocating. Like, for example, we moved from the Bay Area to Dallas so that we can save even more on expenses while growing our wealth. And obviously, if you can reduce that percentage for wants, that’s even better. So instead of 30%, for wants, maybe you can reduce that to 20. And then instead of 20% into savings and investments or paying off debt, you can increase that to 30%. So figure out those goals so that you can understand where you are financially and where you’re trying to go. Other goals you might want to set is for example, first getting out of debt, possibly saving up to $10,000 and $100,000 $500,000 1 million, whatever it is, this is going to definitely help you with your trajectory. If you are trying to get to that certain place, you set a big goal and then you also have milestones to help you achieve that goal. I also think that financial goals don’t always have to be net worth goals. It could even be cashflow goals, or passive income goals. Those are also great goals to kind of keep in mind as well. Mistake number two is spending more than you make. So according to this Business Insider article, 70% of millennials are living paycheck to paycheck and as more than any other generation. So that’s definitely something that’s worrisome. And that’s why people made like the 5030 20 rule to help people understand where their income should actually be going. Also, many people tend to succumb to lifestyle inflation or lifestyle creep, it basically means that the more income you make, people tend to start spending even more as well. So that’s definitely a huge problem. It can be tempting to spend all the money you make on fancy cars, jewelry, bags, whatever but your walls never gonna grow right you need to understand the difference between looking rich versus actual well, so don’t fall into the trap of you know, comparing with other people and needing to upgrade all your different things so that you can match other people kind of reevaluate and see how you are spending your money and see if different things are just you know, desires versus actual needs figure out if it’s in line with your values. For example, for me, I value experiences so I’m more okay with spending money on like travel and things like that. I still do it in a frugal way I would say but for me, right? I know that I value those things and I’m okay with putting more money into it. So it’s definitely important to kind of reevaluate how you are spending money for example, if you are spending on those nice things like shoes and bags and clothes or those things you actually really need

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Eat or are passionate about? Or are you just doing it to keep up with other people and to impress people you don’t even care about. So it’s important to be grateful with what you actually have tried to follow that 5030 20 rule right 30% Max on wants. And if you can lower that, that’s even better, and then instead put 20% into savings, paying off debt or investments. third mistake is not having an emergency fund, it can be tempting to actually put all your money into your investments or spend all your money, but you actually need to have some emergency funds because you never know what’s going to happen. emergencies can happen to anyone at any age that can go from losing a job to an unexpected bill or something happening to your health or a loved one’s health. So that can be nerve racking. And it’s important to have those cash savings in case anything goes wrong. So you can build your emergency fund over time, I would say a lot of people recommend having six months of expenses saved up another way to think about it is having at least three months worth of your salary saved up. So it kind of depends on what goal you want to set for your emergency fund and your risk tolerance. So make sure to have those backup funds. In the CNBC article they said only 39% of Americans have enough savings to cover a $1,000 emergency and that’s really scary. So you need to make sure you build up those funds to cover things in case anything happens. Number four is not understanding your student loans. Now with student loans, you really just need to work on paying off that debt. college tuitions have gone up tremendously. According to the CNBC article, students at public four year institutions paid an average of $3,190 in tuition for the 1987 to 1988. school year with prices adjust to reflect 20 $17.30 years later, that average has risen to $9,970 for the 2017 and 2018 school year, and that’s a 213% increase. So I totally understand that it can be really hard to pay off student loans when these tuition fees have skyrocketed. So important things to know is you do not want to fail on making payments. refinancing your student loans can also help you a lot that way, you might combine a bunch of student loans into one loan that has a lower interest rate. And that may help a lot. But keep in mind that if you refinance your federal loans, you will have access to federal programs like student loan forgiveness for those and must be a federal loan for that to work. So you should see if you qualify for student loan forgiveness, maybe you are a teacher, you’re in the military or volunteer things like that, see if you qualify. And if you can, you can pay more than the minimum so that you can pay that loan off ASAP. So you can make extra payments to pay it off faster. Now, if you are trying to pay off those student loans, it might make sense to take more part time jobs or take more side hustles or build those high income skills so that you can earn money faster. And I’ll go into all that in a bit. But let’s go into Mistake number five is going into debt for the sake of luxury. This is kind of like what I mentioned with lifestyle, inflation and lifestyle creep. It’s similar in that you might be comparing with your friends, it can be really tempting to want to keep up with their lifestyle, but their lifestyle might be different from yours, their financial goals might be different from yours. And if you’re in a tough spot financially, it’s okay to say no to your friends, sometimes it’s okay to prioritize saving and paying off debt. So don’t be afraid to be vocal about it. So for example, if you’re invited to expensive activities, you might want to say upfront that you prefer doing free activities or you just can’t go out and just be open and upfront about how you are trying to save money you’re trying to pay off your student loans, whatever, just let them know that that’s something you’re prioritizing right now it’s possible, have fun with your friends without going into even more debt and your future self will definitely thank you for considering this. And I would say that if they are true friends, they will understand and they will support you. Now Mistake number six is not shopping around and comparing quote, you can honestly save so much if you just shop around for the best deal that can be for your car, your phone provider travel, big expenses like that you can save so much money. Same thing with clothes and things like that. I definitely always do this. I always compare prices and try to get good deal. So don’t just go for the first thing you see, take some time see if it makes sense. See if things are overpriced, and you need to look for other things. Having this habit will help you a lot in the long run. I did this with my car I spent $6,700 for a 2012 Nissan Sentra, that was a good price at the time in the Bay Area. Maybe it’s not as good as if I lived somewhere else. But it was good at the time. Everything was way more expensive. And I got to pay all cash. I didn’t have to get a car loan. So to me that was one of my favorite purchases. Also I save a lot on travel. For example, I spent $150 for a one way ticket to Stockholm. I paid $150 for a flight from San Francisco to Milan and then Prague to Budapest and that was all combined. It was like a slick deals deal. We recently went on a honeymoon cruise and we only paid about $493 or five nights for two people. So it’s basically like $50 a night per person. And that’s because I spend time kind of comparing quotes and I save a lot just doing that really easily. I know people spend 1000s of dollars flying to Europe or flying to Asia, but if you just compare quotes you flying to the cheapest airport and the fly within the cost

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In it, that’s going to be so much better price wise. And if you have this habit of doing this, it’s going to save you so much in the long run. Mistake number seven is not watching your credit score when you’re young, you tend to not really think about your long term consequences. So it’s important actually, to keep these things in mind, make sure you are practicing delayed gratification instead of just doing things impulsively. Because knowing where your credit score stands is actually very important in understanding your financial health. So your credit score is kind of like your credibility, lenders are going to feel safer lending out to you in the future if you have a good credit score, because they know you have a record of paying things back in time in full. Now in order to build your credit score, there are five different factors that are very important to it. One is payment history that usually accounts for 35%. Second is credit usage, which is 30%. Age of credit accounts is 15%. credit mix is 10%. And new credit inquiries is 10%. So you’re gonna want to build your credit history and make sure you pay off your debt on time and in full, the longer you go without paying your bills, the lower your credit score is gonna get. So it’s really important to pay those bills off. So to be safe, I set automatic payments, but you need to make sure you are organized enough to do that. So make sure at an early age, you’re tracking your credit score and trying to improve it. Mistake number eight is being scared to take calculated financial risk. Now I’m definitely not trying to say that you should take risks, you should take dangerous risks. But having a little bit of calculated risk is important. For example, investing in long term index funds, it can be slightly risky, because you never know what’s gonna happen. However, historically, the returns have been around 7%, or me personally, that is a risk worth taking, because inflation is 3%. And it can be risky to just put all your money in savings because you are losing purchasing power every single year in your 20s you have that room, especially if you don’t have a lot of huge responsibilities. So you can think more on you know, creating your business or investing more. These are definitely things to think about. I like taking more calculated risks, I am very risk averse. I try not to do anything too crazy. But I do take calculated risks. For example, we have 32 rental units. For some people, they might think that’s really scary, but we have enough cash flow to cover all of our expenses. So in case of any downturns in the housing market, it should allow us to hold on to those properties because of that cash flow. So I guess what I’m trying to say is that you do have room while you’re young, especially before having responsibilities, you also if you are going to take risks and make sure they are calculated you thought through everything planned ahead. It’s within your risk tolerance, so you know what the risks are. And you’re okay with it. Because for example, when it comes to investing, you should only invest what you’re comfortable with losing to be honest. So I’m not a financial adviser, I’m not telling you to do any specific thing. But it is something to consider while you are young. Mistake number nine is not starting a retirement account sooner, it might seem like such a far away thing to think about right now. But it is actually really good to start earlier with this, a lot of advice people try to give is, you know, save 10 to 15% of your income for retirement if possible. So for example, with a Roth IRA, once you start earning money, you can start contributing to it. There’s actually no age limit for this as long as you have earned income. So if you’re super young, it could be coming from modeling, it could be coming from acting or even through odd jobs or working on your mom or dad’s business. But it has to be real work in a reasonable way. So contributions to a Roth IRA is actually after tax money, which means you’ve paid the taxes up front and then the money invested in the Roth IRA grows tax free. Also, when you start contributing to your retirement accounts, it is best if you don’t actually touch those until you retire with a Roth IRA. You can withdraw your contributions tax free whenever you want without penalty, but I think it’s better to leave it there because you can reap the benefits when you’re old and you retire. Now, last mistake number 10 is wasting your free time time is super valuable. So if you use that time to spend on you know, creating a side hustle or start building high income skills that’s going to benefit you so much. So if you’re complaining, you don’t have enough time, maybe you should kind of spreadsheet out how you’re using your time. Are you using some time to watch Netflix, can you replace that time to doing something productive when you’re young, if you can start building your income sooner than later, it can benefit you so much because you have more to save, and then more to put into your investments, investments grow exponentially. So the sooner you start, the better and your future self again, is going to thank you so much. If you start earlier, I’m happy that I actually started working on my side hustles in 2015, but that’s like when I was around 25 And I’m friends with so many people now who are like 2122, even under 20 who are actually like working on their side hustles which is insane because honestly, they’re gonna grow so much with all this stuff. They’re starting so much earlier, and that’s why I commend them and respect them because I think at that age like at 19 I was definitely not thinking about money too much. I was kind of financially savvy and saving and putting some of that into investments. But I wasn’t thinking in terms of how

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How do I make more money through side hustles or building a business, I was more focused on getting good grades and just having fun. So if I spent more that time thinking creatively on how I could build my income, my wealth would probably be much greater, my passive income probably would be even greater as well. But at the same time, I’m not going to beat myself up for and I don’t think any vi should because we’re all on our own journeys. Money isn’t everything, right? It’s not a race or anything like that. So I don’t want you guys to feel like if you’re making any of these mistakes, that you’re messing up in life or anything like that, we all have the opportunity to learn and grow and change how we’re doing things. So make sure you are practicing kindness to yourself. So I hope you guys enjoyed this episode. Please make sure to rate review and subscribe. It really helps our podcast grow. And thanks again. I’ll see you guys in the next one.

Transcribed by https://otter.ai