Avoid These 3 Money Mistakes in Your Mid-Twenties for Success
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Chapter 1: Understanding Money Management
From an early age, many of us find ourselves on an endless quest for financial stability. The struggles we face during childhood, such as striving for better educational opportunities and taking on student loans for higher education, all lead us to one primary goal: employability.
While some individuals may follow a conventional path toward high-paying jobs or entrepreneurial endeavors, fundamentally, we're all working to escape financial difficulties. I’ve had my share of experiences in this regard, and let me tell you, it felt like trying to fill a bucket with holes.
Fortunately, my perspective has shifted over the past year and a half. Although I’m not a tech mogul, I've found a balance that allows me to live a debt-free, simple yet comfortable life. My emergency fund is robust enough to support me for a year and a half, even during tough times. Yes, I’m a millennial, and I’ve learned a few vital lessons.
So, what changed for me?
I realized I was only seeing part of the financial equation. Growing up in a middle-class Indian household, the emphasis was heavily placed on earning money, often neglecting the equally important skill of managing it. Caught between the adage "Money can't buy happiness" and the notion that it can purchase things that bring joy, I failed to understand a critical truth:
Spending all your money chasing immediate happiness can lead to future financial distress.
This isn't a lecture from a miserly penny-pincher; it's a crucial insight worth considering.
Before delving deeper, we should clarify that money itself is devoid of moral connotations or emotional weight. Simply put, money represents value: it's a means of conducting transactions. You receive payment for the value you contribute to the market and, in turn, use that money to obtain what you desire. The market sets the prices, not you. Thus, understanding your consumption habits is just as vital as knowing how much you earn.
Your spending habits should correspond with your ability to generate value. In youth, it’s often easier—and sometimes addictive—to spend money rather than to earn it.
Consider this: According to Forbes, millennials frequently spend on luxuries, even when many have less than $1,000 in savings, with a significant number lacking any savings at all. This trend isn't unique to my generation; even baby boomers, despite being one of the wealthiest generations, struggle with saving and carry substantial debt.
We currently exist in an era of extremes, where we either care too much or not at all. This leads to three critical money mistakes that can quietly undermine your financial health.
MONEY MISTAKES TO AVOID IN YOUR 20S - This video discusses common financial pitfalls young adults face and how to steer clear of them.
Overspending to Impress Others
"Most successful people are those you've never heard of. They prefer it that way; it keeps them grounded and focused."
— Ryan Holiday, Ego Is the Enemy
When I first saw American Psycho (2000), I couldn’t grasp the significance of the infamous business card scene. A group of Wall Street bankers in the 80s engaged in a subtle competition over whose card was more impressive, despite them all looking alike. It seemed absurd at the time.
Today, those suits have been swapped for casual attire, yet our desire for social validation remains unchanged, if not intensified. Research shows that 90% of millennials feel social media encourages them to compare their lifestyles to others. This isn't isolated to millennials; 71% of Generation X and 54% of Baby Boomers report similar feelings.
So how does this affect our finances? The same studies reveal that around 60% of millennials have made impulsive purchases to alleviate feelings of inadequacy sparked by what they see on social media. The connection between the need to showcase wealth and financial stress is clear.
The takeaway? Ask yourself if your spending is a wise investment. It often feels more gratifying to spend than to earn, which fuels compulsive spending behavior. To combat this, educate yourself about your purchases.
We mainly trade our money for two types of assets:
- Appreciating Assets: These increase in value over time, like real estate or stocks.
- Depreciating Assets: These lose value, such as cars or electronics.
Understanding the difference between these assets can prevent costly mistakes, like borrowing money for the latest smartphone while neglecting essential bills.
Failing to Value Your Time, Energy, and Health
While reckless spending can be damaging, hoarding money is also a misconception. Saving money is certainly better than squandering it, but valuing it above all else can lead to unhealthy mindsets.
Money is merely a tool for facilitating transactions. It shouldn't be feared or idolized; it's meant to enhance our lives. Yet many place it on a pedestal, leading to anxieties about financial discussions.
This mindset can trap you in a cycle of living paycheck to paycheck, sacrificing your well-being in pursuit of financial security.
As Vickie Robin states in Your Money or Your Life:
"Money is what you trade your life energy for. You sell your time for money, regardless of the hourly rate."
Frugality can help curb overspending, but a scarcity mindset can hinder your potential for growth. Time is our most precious resource, and valuing it properly can lead to better financial choices.
- DeMarco discusses this in The Millionaire’s Fastlane:
"Value your time poorly, and you will be poor."
He illustrates this by sharing an anecdote about people waiting in line for free food, highlighting our tendency to undervalue time for small rewards.
- Ignoring Inflation
Inflation gradually erodes the purchasing power of money. For instance, what you could buy for $1 in 2010 costs $1.27 today—a 26.84% increase over 11 years. Countries like India and the U.S. are experiencing higher inflation rates, which means that wealth loses value yearly.
Despite this reality, many prefer discussing celebrity gossip over financial concepts. A staggering 75% of adults worldwide lack an understanding of basic financial principles.
The lesson here? It's better to prepare than to complain.
Recall our earlier discussion about appreciating versus depreciating assets? Now, factor in inflation. For example, if you have $1,500 and divide it into three parts—investing one in an appreciating asset, keeping another as cash, and spending the last on a depreciating item—the differences in value after several years will be significant.
To combat inflation, it's crucial to invest a portion of your savings in appreciating assets. While managing consumption and using time wisely will increase your cash flow, it won't preserve your wealth's value over time.
Ultimately, personal finance is unique to each individual. Everyone has different goals and lifestyles, so what works for one may not work for another. However, being aware of these three common financial mistakes can benefit anyone, regardless of their financial situation.
Money Mistakes to AVOID in Your 20's - This video elaborates on critical financial errors to avoid in your twenties, providing insights for better money management.