Last week, I was invited for a webinar to talk to young people about personal finance. One of the topics they wanted me to address is money traps to avoid in their 20s.
Before I gave them my thoughts about it, I asked them to share the money traps they knew of or the money mistakes they had made so far.
They talked of buying cheap clothing & shoes, buying make-up, books (I cringed!), hair extensions, using Ubers, dining out, hanging out with the boyz, and partying. One gave an example of the multiple times he has gone out with the boys, knowing too well that he only had $2 in his wallet but always spent over $10.
Some of them said that in your 20s, you should avoid all the above in order to save money. The others agreed that overspending in the said categories is a money trap.
My thoughts on the same are different.
It’s okay to spend on hair, clothes, shoes, make-up, to eat out once in a while and it’s super okay to go out with the boys. Spending on these things only becomes a problem if you don’t have a plan.
If you’re spending on them without a budget, where you just walk into a shop and buy with no limit, then it becomes a trap. It’s worse if you’re enjoying these things using money you haven’t earned yet, otherwise known as debt.
I have said it multiple times on this blog. Life is for the living. Denying yourself luxuries and pleasures is a short-term solution to your financial challenges. You need to find a balance.
You need a budget that works.
The Wealth Tribe Budget Tracker will help you find this balance.
Money Mistakes to Avoid in Your 20s
1. Financial ignorance
Did you know that financially illiterate people pay higher interest rates for loans?
Yup! Financial ignorance is big business for financial institutions.
Being financially illiterate is a risky affair. Not only do you pay higher transaction costs while accessing financial services, but you also risk being denied access to a loan facility because you’ll have spent your 20s ruining your credit score.
Society is designed to keep you financially ignorant. To keep you in debt. Which explains why they didn’t teach you money management in school.
Two-thirds of the world is financially illiterate.
If you desire to thrive, to build wealth, to stop stressing every time you get your monthly bills, then educate yourself about how to make and preserve your money.
This blog is dedicated to ensuring that you learn all the ropes through weekly articles and by bringing together a community that openly talks about money. Subscribe here to stay ahead of the game!
I also shared a list of the 10 best personal finance books that you should read here.
Just so it is with the sons of men. Give them a choice of gold and wisdom-what do they do? Ignore the wisdom and waste the gold. On the morrow, they will wail because they have no more gold. – George S. Clason
2. Get rich quick mentality
I shared a story about how my cousin lost $16,000 through the Forex Trading investment scams that are all over the internet. He almost recruited me into it and I remember being very excited and thinking that I had hit a jackpot.
I think everybody has fallen prey of one or more scams where they promise to magically double your money overnight.
And just about everyone I know has received one of those Multi-Level Marketing (MLM) scheme messages that promise you riches through minimum effort during this COVID-19 period. I wouldn’t blame or shame anyone for considering joining an MLM because this pandemic has left so many of us financially vulnerable.
However, it’s important to remember that these people actually take advantage of the same vulnerability and leave you in a worse off situation mentally and in debt.
It’s hard not knowing if you’ll ever ‘make it’. If you will eventually attain financial freedom. Still, it’s better to take the high road, to work with what you have as you work towards earning more in future.
Gold flees from the man who would force it to impossible earnings or who followeth the alluring advice of tricksters and schemers or who trusts it to his own inexperience and romantic desires in investment. — George S. Clason, The Richest Man in Babylon
3. Lifestyle inflation and lifestyle hyperinflation
You will experience different forms of growth in your 20s. You will be promoted at work, you will move companies, you will start your own business, you will move abroad, you’ll get a partner to build wealth with, you’ll have your 9 to 5 while also running a side hustle…
Most of these will also mean earning more money which is great; only if you create systems in your life that you ensure that you keep some of the money. Earning the money is one thing. Keeping it is a totally different ball game.
In my article on how to stop living from paycheck to paycheck, I wrote about one of my clients who has been working for 8 years yet has no asset to show for it. She has a negative net worth.
Don’t get trapped by lifestyle inflation which is where people increase their expenditure as their income grows. Or worse, don’t get trapped by the bigger monster, lifestyle hyperinflation where people increase their expenditure without increasing their income.
I shared my lifestyle hyperinflation story here which led me to deep into the fangs of debt and living paycheck to paycheck. Don’t do it.
4. Financial avoidance
Apart from not talking about money, the other big mistake you make is avoidance. Not facing the skeletons in your account.
Did you go through your last bank statement? Do you know how much you spend per month? Do you know if you’re living above your means? How much debt are you carrying?
I do understand the negative emotions that come with this responsibility. I remember how shocked I was when I created a spreadsheet with a list of all people and organizations I owed money. I felt like I had failed, like I couldn’t redeem myself from the situation.
Avoidance is a coping mechanism. However, it’s a temporary solution that comes with big risks such as burying yourself in deeper debt, ruining your relationships, ruining your credit score, being auctioned, extreme stress and anxiety, higher credit card interest rates…
Avoiding the responsibility of taking time every month to go through your finances will have you living a disillusioned life. You won’t have control over your cash flow. You won’t know if you’re making progress or not.
Taking charge of your finances in your 20s is the best gift you’ll ever give yourself.
Living in denial means allowing money to control you, yet you have the power to control it, to tell your money where to go. To gradually build wealth since you still have the advantage of time.
If you don’t know where to start, I created an easy to follow Financial Roadmap. It’s a step by step guide to help you take control of your money while also allowing you to gradually attain financial freedom. Download it here.
5. Debt & ruining your credit score
Take care not to be part of the gang that spends their 20s accumulating debt and telling themselves that they’ll pay it back in their 30s.
Yes, everyone might be flexing on social media, showing off their progress and new items. It’s human to feel bad and to want to be like them, but remember that we never show our financial struggles on social media. The debt, the pending bills, maxed-out credit cards, accounts with zeros…
I use this quote to keep myself in check…
Expenditure is visible. But unfortunately, financial prudence is not. Bragging about how good we are with money is not only socially unacceptable, it is not impressive- in fact, many people will humble-brag by pretending they’re bad with money while they’re not — Kellie Muringi
You’re lucky if your introduction to adulthood didn’t include debt through student loans. I’m still paying my student loan and I can tell you it’s tough especially since the government also made sure that they impose interest rates on it.
I’ve met people in their 40s who still haven’t finished paying their student loans. Part due to avoidance and also because paying debt is hard.
If you can avoid it, especially consumer debt, don’t get trapped.
You want to spend your 20s being financially responsible so that you can relax in your 30s and enjoy more luxuries and freedom.
The magic of compounding will work in your favour if you start investing early, but it’ll also be your worst trap if you decide to accumulate high-interest debt. I explained this concept here.
6. Living without a financial plan
A lot of people will tell you that they want to be rich. Wealthy, in fact. Who doesn’t? They’re sure that they’ll be rich in future but if you ask them how they have no plan.
When it comes to making and preserving money, being hopeful is not enough. It has to be a deliberate and actionable plan.
You won’t hack it without a plan. Without creating a budget and sticking to it. You’ll need to have financial accountability meetings with yourself or partner or financial advisor in order to track your progress and keep you committed to your goal.
Recommended read: How to track your net worth
Wealth that stayeth to give enjoyment and satisfaction to its owner comes gradually because it is a child born of knowledge and persistent purpose. — George S. Clason, The Richest Man in Babylon
7. Being stuck in your fear of investing
You’re young. You can afford to lose money now ( I don’t mean that you should allow yourself to be a victim of pyramid schemes and other investing scams) and still recover.
You have the time to learn, unlearn and relearn everything about money.
It’s harder to make mistakes when you have more responsibilities. It’s harder to go back to zero when you have kids or a spouse who depends on you.
Investing is scary even in your 20s, but there’s no way around it. It’s the only way to grow your wealth.
I wrote the best beginners guide to investing, a piece I’d have wanted to read when I started out when I didn’t know anything about investing.
8. Believing in gurus
Yes, seeking financial advice is a smart move. I seek advice a lot. Having a financial advisor will give you better results as compared to trying to figure it out on your own.
When I share these articles with my girlfriends, they sometimes call me a financial guru. I insist that I’m not. I’m learning on the job, just like everyone else who’s good with money.
I know a thing or two, and I have a personal finance consultancy business, but even with my clients, I insist that they should do their homework. If they want to invest in something, they should also do the work to fully understand what they’re getting into because, at the end of the day, they have the last word.
Believing people to be gurus, know it alls, investing gods will have you losing your money faster than you earned it. Question other people’s thinking. Do your research and make most of your financial decisions based on your independent thinking.
Gold clingeth to the protection of the cautious owner who invests it under the advice of men wise in it’s handling. George S. Clason
Being financially illiterate at the moment may keep you procrastinating on taking action with your finances. You may even feel that understanding financial topics is challenging, or you might have hard a difficult financial experience in the past. All of these are valid reasons.
However, you can’t afford to lose even more money now and in future. Don’t jeopardize your chances of building wealth. It’s possible to learn. Give yourself the gift of time, be patient with yourself. Eventually, it’ll pay off.
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