Today I will reflect on young professionals finance mistakes. I have become a young professional at the age of 22. It has been very exciting to join one of the top 5 global management consulting firms – the long gone Arthur Andersen. For the next 15 years, I have worked across three continents to advise retail banks on strategy, structure, and efficiency. I have met thousands of bright and smart young professionals along the way. What always struck me is that 99% of them, despite being very successful at managing their career, were very poor at managing their finance. Read on about some of the young professional finance mistakes. I have arranged those mistakes in a story that corresponds to early career stages. Enjoy the read.
Young professionals finance – early career mistakes (1 – 3 years)
You have landed a dream job. You have become a young professional. Finally, all hard work and effort start to pay off. You earn much more than an average person your age. This is where you start facing certain challenges.
Not enough focus on bad debt management
In many countries, people borrow money in order to go to college and land the dream job. Many individuals around the world are in huge debt at the start of their professional career. Many people do not target eliminating bad debt first. They want instant gratification instead. They have been working so hard to get this great job that paying off bad debt is the last thing they want to do right now. You are now surrounded by people that earn more than you and want to fit in the social cycles.You are required to have a professional image. Shopping for nice suits, shoes, and other accessories become a part of your lifestyle. Your spending habits have changed and steer you away from one of the most important personal finance goals which is bad debt elimination.
Getting tempted to grow fixed costs
You have started to have significantly more money at your disposal than before. On top of making single purchases that you think will help you to fit in the social cycles, you start making decisions that will have a long-term impact on your personal finance. Many of us get tempted to grow fixed costs at this stage. Typically you will stop sharing flats and rent one on your own. There will also be a number of smaller items like various memberships, subscriptions that will add up to your annual fixed costs.
Young professionals finance becomes a challenge
I want to underline one key risk here: since you have grown your fixed cost you now must earn a certain amount of money every year to cover those expenses no matter what. You start to see that despite you earn more, you do not necessarily have more at the end of the month. Does that ring a bell? I am sure it does. But most of the young professionals do not care. They are surrounded by people who have great career opportunities. You start working hard to climb the corporate ladder and earn more. You do not understand that it is not your salary that makes you rich. It is your spending habits.
Young professionals finance – growing career mistakes (4 – 8 years)
Your career starts to gain momentum. You have passed the entry levels and look forward to making it to junior managerial positions. Achieving this goal is just around the corner. More money is around the corner as well. In the meantime, your needs have changed. You start making other personal finance mistakes
Buying depreciating assets
One of the greatest mistakes in personal finance is buying depreciating assets. A new car is the best example. The moment you buy a new car and make one mile it loses 20 – 30% in value. This mistake is costly and yet it is being made by many of the young professionals. They also multiply the negative effect by leasing a new car. Not only they lose money over time, they also build up their fixed cost that I mentioned in the previous section. Not to mention, they pay interest on that bad debt.
Lack of focus on building reserves
Young professionals very seldom care about building reserves in the early years. Their careers allow them to grow salary at a double-digit pace every year. They think that with the next promotion or the next bonus payout they will set aside some money. This is rarely the case. Lack of reserves means that every single unexpected life event like damage to property or health issues drives them towards bad debt. They start borrowing money to keep up with their fixed costs and lifestyle.
Young professionals finance becomes a challenge (again)
Let me underline another risk here. Keeping up with the requirements at work becomes more and more time-consuming. Corporations will always give you enough of new challenges. New responsibilities will be thrown at you and move you out of the comfort zone. Your greatest asset – time, is suddenly taken away from you. As a consequence, you do not have enough room for reflection, including thoughts about personal finance. You got used to delivering on other people goals forgetting about your own…
Young professionals finance – established career mistakes (8 years plus)
You have made it to managerial positions. Great career achievement. You want to reward all your efforts. You keep on making more money and more costly mistakes as well.
Growing liabilities instead of assets
You got used to the fact that putting more effort at work gets you bigger salary year after year. Many do not think that there is a ceiling to their annual salary. In fact, there is. Making all mistakes that I have mentioned before puts you in the situation where you have not managed to secure assets that pay you cash over time. Assets that will help you pay for some of your costs but also take away some of the pressure to earn more. In the meantime, your needs have grown. At this stage, most young professional finance becomes deteriorated by taking on an immense mortgage to finance their dream home in a great neighborhood. You keep on growing fixed cost and liabilities. Have a look at how you could grow assets. Investing in rental properties
Letting other people manage your money
I have mentioned that time becomes one of your most scarce assets at this time. You most probably have a budget surplus every year but do not have time to tell your money where to go. What do you do? You follow the advice of bankers, brokers. Some people decide to keep their cash at the bank and let inflation eat it over time. Money does not make you secure, cash-paying assets make you secure but you haven’t put your mind on building your asset base. You were too busy with your career.
Young professionals finance – final thoughts
There is always time to get in control of your personal finance. It is obviously better to start early and avoid mistakes rather than fix them later on. I am great fan and advocate of Financial Independence. I have made all of the above mistakes over the last 15 years, but I have never repeated any of the mistakes twice. What I have done instead is I have build a significant portfolio of real estate. I own both residential and commercial properties that pay for 100% of my costs. You can learn more about personal finance management and a road to financial independence here.