The #1 Money Mistake You’re Likely To Make In Your 20s
So you want to be rich, well-off or just reasonably liquid. Who doesn’t?
Watch out – there’s one critical mistake that many people make, namely denial. It’s a tendency to think, “I have my whole life in front of me, so there’s no hurry. I can start saving when the mood hits me. Meantime, I’ll just carry on splurging, because you’re only young once.”
That is one line of denial.
The other line is the reverse. You tell yourself that you have already had a few close calls and are unlikely to even reach 40.
In fact, there’s a good chance that you will live a long life, because the average Australian goes on for 82.25 years. And in light of mounting improvements in diet and medicine, you may well last longer. And your money should too.
Time to face facts – start saving for the future now. That means adopting the habit of putting something away.
Start now, because the sooner you begin saving, the more time your money will have to grow.
On the other hand, if you slack off, you risk joining the ranks of people who tried to defer reality indefinitely. Non-savers wind up being forced to work furiously in their 60s when their energy levels are sagging badly, to make up for the missed opportunity of saving when they were younger.
Happily though, saving is less of a pain than it may seem, thanks to the power of a magic formula called “compound interest”. That’s interest gaining interest.
The passive but positive feedback loop means that, in time, putting just a little money aside each month makes a massive difference.
In a sense, compound interest means that the game is rigged in your favour, if you can muster the grit to scrimp. Aim at saving a good portion – a third of your income through curbing extravagance.
Instead of splashing out on a Maldives over-water bungalow stay, you could couch surf in Byron, Brisbane or Nimbin. That way, besides saving money, you avoid jet lag and queuing at customs. Even more bang for buck is offered by a “staycation” – an uber-frugal holiday at home.
The question is where to put the money you heroically save. You could sock it away in your low-tax retirement superfund if you have one. Or you could sink it into a savings account that pays interest, which stacks up in time.
Or you might want to try stocks – the safe and unexciting blue-chip kind for example, or dividend stocks that can fund themselves through payouts, if you are lucky.
You might want to consider putting it towards a deposit on a unit or house. With a little bit of research, property investment can be a smart move.
Whatever happens, take action. Start setting a regular slice of your cash aside now, with an eye on the future, because the future has a habit of rolling up sooner than expected.
In fact, the older you grow, the faster time seems to go, so get ready! As they say, the best time to plant a tree was 20 years ago. The second best time is now.
Anybody can grow wealthy if they start promptly and treat investment as a priority instead of a taboo.
Disregard anyone who says there’s no point. Compound interest means that every bit you put away helps in the long term.
Think in terms of decades rather than just months, because life’s financial winners are realists with plenty of patience. They play the long game.
David Wilson is a business writer with 20 years’ experience in journalism.