The One Money Mistake Most 20-Somethings Are Making

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My friend has been worrying recently about some financial problems that she’s faced with, and because friends listen, that’s what I’ve been doing. For one, she’s complaining about the lack of shifts that she’s getting from work, on top of the low wage that she’s earning. The non-stop worrying that she greets me with made me realize something pressing in these modern times. It’s the elephant in the room that we refuse to discuss because for some odd reason, our educational system failed to prepare us for financial realities outside the confines of our classrooms and lecture halls.

I’m talking about our inability to manage our own money, and moreover, our ineptitude to prepare for the future.

The truth is, right now, the newly graduated and newly initiated into the work force hold something powerful in our hands, and ignoring this reality will cause more than just regret later in life. We don’t prepare for the worst. Stoic philosophers like to engage in personal meditation by asking themselves the question “What’s the worst that can happen?” In doing so, they mentally prepare for the worst and let their minds settle into that reality. In the process, eventually, they begin to envision this worst-case-scenario as being not too bad after all.

My friend is not alone, obviously. It’s a case of financial mismanagement and unfortunately, for most people, it is only learned after much time has passed. The very same thing that we see as inexperience and youth can very much be the antidote to our financial difficulties. Right now, if you’re in your 20s and able to work, then you should be more than thankful because you have time on your side. Yes, time is the single most important factor in investing and managing money, the rest bear little importance. Compound investing is the result of time. It is a hockey stick growth that if applied in real life, can yield a fruitful financial bearing later. I’m 23 and in 40 years, I will be 63. Assuming I will be retired by then, if I invest $3,500 every year and simply mimic the results of the market, I will end up with about $980,000 by the time I’m 63. This is based on modern financial theory and is derived from historical market returns. The market, however is cyclical and even after looking at returns prior to the great depression of 1929, the returns still average around 8% per year. (That is to say, free money.)

In my opinion, saving and investing money is just one step in a multitude of necessary steps towards achieving financial success. Handling money is just as important as saving and investing it, and it’s no coincidence that the two are connected. The challenge for us though is execution. As a 23 year old, I feel like being of this age gives me the liberty to splurge and go all out with my spending. We are under the guise that the future will be brighter and better and now should be a time to have fun and enjoy. I’m certainly no saint: after all, I spent 6 months traveling around the world. Which is why I put my goals in consideration with ample shrewd decisions. With that in mind, when I traveled last year, I still managed to save more than enough money and put that towards my investment account. The lesson here is to envision a reality that you want and take action now with facts you have at the moment – things that are within your control. The market direction is not within your control, but saving money is. Make the step and let it ride for the long haul.

As for my friend, there are a lot of other financial issues that she needs to deal with. First, she needs to spend below her means, that means working while alive and not alive to work. Secondly, once she is able to settle her situation, pay herself first and develop that habit so that it will be second nature to save. Personal finance should be simple and easy. I don’t believe in anything complex when it comes to managing money because it’s hard to follow and it gets lost in all the action that’s going on. Case in point, my portfolio is composed of a handful of ETFs that replicate market moves but with a slight advantage. I drop money in my investments over time to take advantage of market dips; that way, I’m able to beat the market in the long haul. A little bit of diversification plus market timing equals a successful long-term strategy. Focus and perfect the basics – the rest should be devoted to the more important aspects of your life like family, work, and leisure.

I learned my lesson the hard way. In the 2013 calendar year, when the S&P 500 returned almost 30% in gains, my portfolio tumbled in the other direction of equal magnitude. For 3 years, my strategy of fast gains along with risky bets have paid off but last year, it finally caught up. I deserved last year’s painful beating but it was a hard lesson learned. Since then, my outlook on investing has changed for the better — think long term, ignore the market noise, be as boring as possible, and minimize investing friction with less action. Index funds and ETFs are a good way to begin. The gains should follow suit with time as the best possible asset. Our 20s should be some of the best years of our lives, but let’s remember to take advantage of opportunities that this age presents because it’s not like we’re 20 forever. TC mark

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