3 Financial Traps for 20 Somethings
Your 20s are an exciting and important time in your life. During your 20s, you have the opportunity to learn, explore and set a sound financial foundation. As you begin to make more money, you have options in terms of how to spend or save. The financial decisions you make can make or break your financial security in later years.
Just like a mouse falls victim to the cheese in a mousetrap, we too are susceptible to financial traps. With the excitement of making money and the pressure of ‘keeping up the with Joneses’, it’s easy to get tunnel vision and focus on the ‘financial cheese’… the cars, the clothes, the house, the vacations, etc.
The illusion of the Joneses is a trap. As we often hear, the Joneses are likely broke! So, why would you want to be like them? Don’t sacrifice your long-term financial health for short-term pleasures.
Believe it or not, not everyone has your best financial interests in mind. You have to learn to play defense! But, before we start pointing fingers, it’s important to understand that *you* might be your own worst enemy. You’ll need to play defense against yourself.
There’s no doubt the cheese on the trap is appealing, *BUT* if you say no to the cheese you might wind up finding the cow. The cow can make you exponentially more cheese!
Which do you want?
Don’t be a sucker like the Joneses! The cheese isn’t worth it, but the cow is!
Below are 3 financial cheese traps to avoid in your 20s.
1. Lifestyle Inflation
Lifestyle inflation happens when you get a raise or some other financial windfall and choose to use the extra money to elevate your lifestyle rather than saving towards retirement, paying down debt or otherwise securing your long-term financial future.
Being aware of lifestyle inflation is the first step towards combatting it. One strategy is to try and hide the extra money from yourself. If you’re comfortably living on your current budget, odds are you could continue living that way. So, take the extra money and throw it at your debt or into your retirement account before it settles down in your checking account!
The temptation is strong. You work hard at your job and want to reward yourself and it’s OK to reward yourself from time to time. I’m not promoting a no-frills life, but you should make important financial decisions with your goals in mind. There will always be something else, so learn to play defense and understand the implications of your decisions.
If you continue to let your lifestyle inflate, you will find yourself supporting a luxurious lifestyle later in life, with nothing to show for your hard work. Not cool…
2. Putting Off Saving for Retirement
In your 20s, it’s easy to think retirement is tomorrow’s problem. It’s so far away, right? Retirement savings *can’t* wait! One way or another, we will all be forced to stop working someday. The sooner you can start saving, the better. Whether in an IRA or 401k, your 20s are a great time to get started on your retirement savings.
The power of time is incredible and the longer you’re money is in the market, the greater returns you’ll enjoy. This is especially important if your employer has a company match. Take advantage of the free money, and the time that free money will spend in the market!
There will be times when your mind will tell you it’s ok to put it off for another year. Don’t be a sucker! In most cases, you need to walk away from the mouse trap. Saving towards retirement is working towards the cow and waiting to enjoy cheese (delayed gratification).
The cow is your nest egg, your savings, your investments. In short, the cow is your hard-earned money at work, and the more time you spend taking care of your cow, the more cheese you’ll enjoy later in life. Moooooooooo
Many 20 somethings accumulate debt either through student loans or credit cards. Staying out of debt and paying off debt should be a priority in your 20s. The longer you are paying interest on your debt, the less money you have available to save!
Getting into and staying in debt is the trap.
Many 20 somethings graduate from college with significant student loans. There is nothing wrong with getting help to pay for college, but how you handle the debt post-gradation is vital.
Additionally, credit cards and other loans have enabled us to buy things (houses, cars, stuff) we can’t afford.
“But they ran my credit and asked me how much I make… I’m approved! That must mean I can afford it…”
Banks don’t care if you can afford it. They care whether you’ll have the money if they come after you when you don’t pay your bills.
If you find yourself in debt in your 20s, the debt snowball and debt avalanche methods are two strategies to pay down debt quickly. Similar to retirement savings, debt needs to be taken care of ASAP. Don’t ignore it – it’s not going anywhere unless you do something about it!
Being debt free is liberating and you’ll be able to focus more of your money, time and energy towards the things that really matter.
Your 20s have the potential to be incredible. Take advantage of your 20s to explore, learn and set yourself up for success later in life. Whether you’re saving for retirement, paying off debt or playing defense against lifestyle inflation, you’re taking a step towards a cow kinda life and avoiding the cheese trap!
While it’s not all about the money, if you can avoid these 3 financial traps, you’ll be in a much better position in your 30s and beyond!
Remember, cow, not cheese!
Till Next Time,