What young professionals get wrong about personal finance

What young professionals get wrong about personal finance

I’ve been a young professional for quite some time now (which means I’m getting older…ha!) and I’ve definitely learned a lot about managing and growing my own finances during this time. I’ve had some bad stuff happen to me (had my car stolen and had to move due to terrible neighbors), and have had some good things happen (promotions at work, becoming a landlord, and (slowly) increasing my net worth). Through it all I’ve had the pleasure to not only learn myself, but to also go through life with other friends and family members. I’ve also through this blog had the chance to meet and chat with other young professionals learning about their own situations. 

In my own journey and going through life with others, I’ve come to learn a few things, fundamental things that unfortunately I hear many young professionals not taking to heart in terms of how they manage their finances. There’s a ton of noise out there, and sometimes it’s tough to know what’s truly good advice. While I think my blog has a fair amount of good advice (I’m obviously biased), I know there are some basics out there that I’d like to clarify. So, let’s talk about (what I think) young professionals get wrong about personal finance!  

It’s all or nothing

I’ve definitely seen a lot of good plans with a failure to launch, and a lot of resolutions being broken when it comes to personal finances. I think this is partly to blame with the image that financial bloggers or others put out, contrasted to what we see others in our own lives doing. There’s a strong FIRE (financially independent, retire early) movement, and this movement essentially goes hardcore on NOT spending money and saves/invests the bulk of their paycheck. Most of us aren’t on the FIRE path, and most us spend money very differently and like to enjoy life now. Like the old country song goes, “I’m not here for a long time, but I’m here for a good time”. Unfortunately, I think a lot of young professionals prematurely give up because they feel it’s FIRE (aka hardcore budgeting and saving) or nothing.

I think that this idea of having to choose one or the other sets you up for failure. Most of us aren’t going to save or invest 70%+ of our paycheck, so why even try? Unfortunately it only feels like there are two options – either go headfirst into saving and investing most of our money, or the status quo of continuing to live a life that’s not financially responsible.

I’m actually a big fan of the idea of “YOLO” but not for the reasons that you may think. Yes we do only live once, and so I’d like to try to maximize my enjoyment of life throughout. Sacrificing too much now for a future that’s not guaranteed isn’t super ideal to me, but also sacrificing a future by being financially irresponsible now doesn’t seem great. As such, I try to pursue a strong balance in my finances of both spending and also saving/investing. I probably save about 35% of my income; spread throughout retirement, employee stock purchase program and general savings. I also of course have my general living expenses, and also try to splurge! I eat out, I take trips, I buy nice things from time to time. There is middle ground! It doesn’t have to be a ‘no’ to everything fun or a ‘yes’ either. Figure out what’s important to you in life both now and later, and come up with a plan to enjoy both! 

Photo by Karsten Würth on Unsplash

How we think about debt 

If you spend any time learning about being better at managing your money, you’ll learn that debt is a very polarizing topic. Financial gurus out there have very different thoughts on debt, and will yell and scream as to why they think it’s a) good to take on debt or b) the worst idea ever. As such, debt I worry is often not dealt with seriously, as young professionals are kind of stuck in terms of knowing what’s smart and being able to make a plan to use or reduce it. 

The truth of the matter is, debt is inherently neither good nor bad. Debt is a tool, a tool that you leverage when you take a risk (i.e. don’t have enough now) for the promise of something now, or later. In my mind, there is good debt and bad debt. Good debt is debt that you take on that has a big reward in store, with a minimal risk. I believe that buying a house for example is a good use of debt (i.e. a mortgage). I don’t have hundreds of thousands of dollars hanging around for me to buy a house, but I’d like to buy a house as it’s a great way to build long-term wealth through the rising of the value of the house and by the equity I get each month as I repay the loan. The same is usually true with a student loan – assuming you’re not overpaying for tuition and obtaining a degree that will provide you with a good paying job post graduation. 

Bad debt on the other hand is things we want now but can’t afford, but really don’t need. Credit card debt is a great example of bad debt, as are payday loans. Car loans are a bit of a grey area for me, although I generally think given the super low interest rates associated with them, they’re not the worst. We don’t really need a new car, and we definitely don’t really need brand new good or services that we can’t afford, and that won’t last.

Stop listening to the noise about debt. Debt can be a powerful tool – just learn to use it wisely. 

Photo by Dylan Gillis on Unsplash

Figure it out later

I remember my first job out of college and how jealous I was seeing my colleagues (making the same amount as me as an Associate), go out and buy fancy brand new cars, eat out several nights a week, and party it up every weekend. I was very financially frugal at the time (well, still partially am), and had decided that I’d try to be a better steward of my money and try to save / invest more of my money instead of spending it all. When I casually talked to colleagues or friends, they notion came out that they’d ‘figure out their finances later’ and instead wanted to enjoy the here and now. I however have come to believe that ‘figuring it out later’ isn’t really that great of a strategy.

Habits are a powerful force, and if you get into the habit of not saving/investing and instead living a lavish lifestyle when you’re young, unfortunately that trend will likely continue, as you become a middle or old professional. I’ve seen it happen before – your lifestyle tends to increase as your paycheck does, meaning that future raises will likely be spent at a similar rate as they are now. So, if you don’t take the time to figure it out now, there’s a real danger that you won’t figure it out later in life. I always say – if you can’t manage a little bit of money now, how can you expect yourself to be able to manage more money later on? 

The second reason ‘figuring it out later’ doesn’t make a ton of sense is due to the time value of money. Debt, as we discussed can be a powerful tool and bad debt like a credit card debt will really hold you back. It holds you back because of the interest you’re agreeing to pay for borrowing the money. Interest is a very powerful tool and when you compound it (i.e. take the interest and put it back in the pot, thus earning more the next time around), it’s even better. Starting to invest and save from an early age will give you such a head start and even if you’re saving/investing just a little now, it’s better than playing catch up later!

Figure out how to manage your money at a young age as it’ll never get easier later, and you’ll always be playing catch up if you don’t! 

I can pick individual stocks 

The stock market is a fun, exciting, and sexy way to make money. It goes up, it goes down, and sometimes we understand why, and other times we don’t. We’ve seen a huge increase in individual investors (which is a good thing!) over the past year, in part due to apps like Robin Hood making it cheap (i.e. free) and easy to buy and sell stocks, and because with COVID and us supposed to be staying at home, it gives us something to do. 

However, as much Reddit as you read, as much Jim Cramer as you watch, or as much Twitter as you scroll, picking stocks is a risky endeavor. I tried this early on as a young professional. I still to this day read stock news frequently and every morning at 9:30am (when the market opens), I’m checking stock prices. With that knowledge, I work to identify those stocks that I think will be winners. I did this diligently for a whole year, tracking my gains and losses and trying to be very active. At the same time, I also had money in a low-cost index fund, which is essentially a basket of most of the stocks in the S&P 500 or another index that is a great way to diversify and lower risk. At the end of the year, I thankfully had made money using my individual stocks but much to my dismay – my low-cost index fund had outperformed and made me more money! It was then that I became a full believer in low-cost index funds and now keep 95% of my investing money there. I do still love keeping up with stocks, but only do so through my ‘mad money’ – or about 5%. I do have some wins, but for every win it feels like there’s another that I didn’t do so hot with. 

Even the best can’t pick stocks right all the time, and we’re certainly not the best, so stop trying! Be responsible and stick with low-cost index funds. Your future self with thank you! If you do have the itch – do what I do and just keep a small percentage in stocks. 

Summary

As with most things in life, what we see portrayed in the media isn’t always an accurate representation of how it is or should be, and there’s a lot of noise out there with personalities trying to convince you that there way is right. I think it’s best to keep it simple with our personal finances, get these fundamentals in place early, and you’ll be setup for success in the long run!

One Response

  1. I think the appeal of figuring it out later comes from a lack of understanding of how money can actually grow overtime plus cultural materialism.

    I also see FIRE the same way I see food photographs in recipe books, aspirational but not reality. I can get close to those principals and that has its own benefit!

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