In part one (click here to see part one), we looked at one of the five ways someone before 25 could ruin their financial life. In the first post, I discussed how everyone has an image of their future self that they would like to achieve. The problem is, many do not think about, prepare for, or get started on making that image a reality. Simply put, we want the reward without the work.
In addition, I discussed the first way someone before 25 could ruin their financial life, which is refusing to accept responsibility. Refusing to accept responsibility is to have a mindset that someone else should be accountable for the decisions you make even though you make them. This allows an individual to avoid expectations and consequences from their own choices.
The following are the remaining 4 things you should do to ruin your financial life by 25:
2. Accumulate as much debt as possible.
Look around. Look around. (Maybe you caught the Hamilton reference) Debt is everywhere.
Nations, federal and local governments, companies, institutions, and the guy next door to you are all caught in the borrow-and-spend cycle. This cycle has become ingrained into our society, so why should you do anything different? Besides, minimum payments can be set just about as low as you want, and you can afford just about anything with the right sales guy on your side. Just swipe with the plastic.
Then, this could quickly become your life…
Click this link: What happens when you just pay the minimum payment
I would imagine you would prefer a different route, so here are some questions to ask yourself.
- Can I wait to buy this item?
- Have I purposefully saved for this purchase?
- Is going into debt for this item a wise decision?
If you can answer each of these questions truthfully and still have no hesitation to make the purchase, then go for it… but if you can’t answer them without hesitation, then you should rethink your decision and consider what consequences the purchase may have.
Don’t get me wrong, debt can be a productive tool (If you understand how to use it and you know how it fits into your overall financial picture), but unfortunately our society has become so consumed in debt and our views on its usefulness are rather flawed.
Here is a simple concept to internalize - if you do not have it, do not buy it. I challenge you to educate yourself about the hindrances of debt, learn about effective ways you can utilize it to your benefit, and know the responsibility you take on when signing the dotted line.
3. Disregard the intangible.
“Live in the moment. Embrace it, enjoy it, and take life as it comes. Do not consider or put any thought to the past and definitely do not think about what you may want, need, or desire in the future, because the future will take care of itself.”
I have lost count of how many times I have heard statements like the above from my peers. With this mindset, ruining your financial life becomes drastically easier. But, what if?
What if you decided to forgo your instant desire and take advantage of the resource that has been given to you – TIME!
How does time impact your financial future?
Time Value of Money - Have you ever heard of this financial concept?
Time value of money declares that a dollar today is worth more than a dollar at any given point in the future. This concept considers the present value of the money, the interest rate, the time frame, and ultimately the future value.
Here’s a hypothetical example:
Let’s say someone owed you $10,000 but said they would give you $11,000 if you allowed them to pay you back in 3 years. You know you can earn 5% in an interest-bearing savings account. Should you take the $10,000 now or wait 3 years?
If you put $10,000 into a savings account that is paying 5% annually, your $10,000 would become $10,500 after the first year, thus earning $500. After the second year, the account balance would be worth $11,025, thus earning $525. After the third year, the account balance would grow to $11,576.25, earning $551.25.
Time allows you opportunity and in this case, if you would have forgone the repayment and received the $10,000 3 years later, it would have cost you $576.25 or more (depending if you chose another investment). The opportunity made you an extra $576.25 ($11,576.25 - $11,000).
Time value of money applies to your investment returns. The more time you allow your assets, the better the opportunity those assets can grow into a larger value.
As late President John F. Kennedy once spoke, “We must use time as a tool, not as a crutch.”
4. Don’t take the match.
AKA, “Stick with the ‘YOLO’ perspective.” To benefit from the employer 401(k) match, an employee must contribute money as well. This would require an employee to forgo the money they worked for and tying it up into a retirement account for “x” number of years. To access the funds, the employee must wait until age 59.5 to withdraw the funds without penalty (there are a few exceptions for a penalty-free withdrawal). Why would you want to do that?
Let me tell you.
Free money. A 401(k) match is the only place where an employee can get 100% return on their investment. All it costs you is… well nothing. You keep the funds you worked for and you get even more, because you decided to implement discipline by preparing for the future. On top of that, those funds can be invested, which gives both your contribution and the match to earn even more.
***Understand that every plan is different and matching and vesting are different. So, be curious and ask your employer for the plan details if you do not know them already. Employers will set matching limits (could be partial or dollar-for-dollar up to a certain amount). In addition, some employers implement a vesting schedule. In short, this means an employee must stay “x” number of years in order to collect the full match.
5. Who cares what you think? Let’s follow the Joneses
Ever heard the phrase, “Keeping up with the Joneses”? What about “Keeping up with the Kardashians”? Yeah, your goal in life should be to do just that. It is a simple concept. If your neighbor, friend, or someone you associate yourself with obtains something, you should obtain one for yourself. It’s fun and it makes you feel really good about yourself…
Hopefully, you caught my sarcasm and you see the many issues with this thought process. Comparing your social class and situation to someone else’s is not wise. Doing so is an ill-informed thought of comparing what you have to someone else and buying things to impress others you do not even care about.
- Why do we constantly fall into this flawed way of thinking?
Because we do not ask the “Why” questions to ourselves. I encourage you to watch Simon’s Sinek’s Ted Talk:
Consider, then apply this thought process to your financial life.
Ask yourself the following:
- “Why am I currently spending my money on this?”
- “Why am I not saving more?”
- “Why am I forgoing a match from my company?”
- “Why do I need to buy this now versus a few months from now?”
I hope you take these 5 things to heart. They will help you stray from the all-to-well-known path of the Joneses and will help you follow your own individual, prudent path.