Financial freedom is like trust–it takes years to build and an instant to ruin. Building a financial foundation takes persistence, sacrifice, and dedication, but a single bad decision can set you back years or even decades. Here are some financially debilitating decisions that a lot of people don’t think hard enough about. Keep in mind that these “mistakes” are assuming that these decisions don’t truly bring you the value that you hoped they would. If these things are worth the sacrifice to your financial future, then more power to you! In no particular order, let’s go over the twelve biggest financial mistakes that young professionals make:
Buying a brand-new car right out of college
The number of people I see doing this is frightening. Many people have student debt coming out of college, multiple 5 figures, and the first thing they do upon graduation is sign themselves up for more debt to get a new car. Many people see it as a reward for graduating, but it is really a jail sentence. Most recent graduates also have moderate credit, which means high interest rates. High car payments and high insurance premiums for relatively young drivers coupled with an entry-level salary is a recipe for disaster.
Buying luxury cars solely for the image or status
If you love cars and truly care about the experience of car ownership, then go ahead if it fits your budget. I am a car enthusiast too (blog coming soon about how to save money by doing basic maintenance yourself)! What I am referring to is when people buy luxury cars and cannot tell you the difference in ownership experience between a Mercedes and a Honda besides the logo. Of course, the Mercedes ownership experience will be better in virtually every respect except cost. Whether it’s worth the extra dough is for you and your budget to decide. As a car enthusiast, I will forever scream this at the top of my lungs: financing a fancy car is not a flex! It drives me nuts whenever people congratulate others for financing a fancy car as if it were challenging to get it. With the exception of exotic cars, you can walk into any dealership with a job and mediocre credit and walk out with any car off the lot for the right (very long) loan duration and (very high) interest rate.
Buying too much house
The bank will approve you for way more house than you can realistically afford. They will approve you for up to 42% debt-to-income (DTI) ratio, which is your total debt and legal obligations, like mortgage/rent, divided by gross income. The recommended value for a home is around 30-33% of your gross income. If you buy a house at 42% DTI, your actual housing cost will be around 50% of your gross income after maintenance and utilities, which is likely to be around two thirds of your after-tax income. Many people buy bigger homes than they can afford in anticipation of having kids because they “need the space.” Add in day care costs and a new minivan payment and they’re well on their way to living paycheck to paycheck for the next decade! I am not saying not to buy a big house if it will increase your quality of life! Just make sure that your housing costs are within your means and that you’ll use the extra space! There are plenty of people with rooms or space that they just don’t use. Remember that you still need to pay taxes, interest, insurance, and maintenance on unused space. It may not be a massive differential, but it’s not zero; you can think of it as the price of flexibility. Remember: just because you get approved for a loan doesn’t mean that you can comfortably afford it.
Signing up for a lifestyle that you cannot afford on one salary in a partnership
Shit happens. Statistically, you or your partner will lose your job or be unable to work at some point. If you have a lavish lifestyle that requires two salaries to support, then you are asking for trouble. Note that I did not say “living” a lifestyle that you cannot afford on one salary. After hitting your savings goals, you can and should live as lavish a lifestyle as your income allows! Travel, eat out, take $100 puppy yoga lessons, get an expensive tattoo, get a PlayStation 5, etc. What I am referring to when I say “signing up” is for semi-permanent payments. Expensive car, expensive house, vacation homes, private school for kids, financing toys or vacations (even at 0% interest), etc. These payments are not easy to get out of if one person loses their job. Other things like travel, eating out, etc., are easier to pull back when income drops as long as your ego can handle it. Lastly, it is a good idea to have larger emergency funds if you have a job with less security.
Not investing their savings
I have met a lot of people who had excellent savings habits, but kept it all as cash due to fear. Let’s suppose you had great savings habits and amassed $50,000 in cash in a savings account. You were scared to invest, so you waited 5 years. Instead of investing for 35 years, you invest for 30 years. The difference, at an inflation-adjusted historical rate of return of 8%, is $236k ($739k versus $503k, or a 32% decrease in ending balance because of a 14% decrease in investing duration). As a young professional, time is your greatest asset. Take advantage of it.
Trying to time the real estate market
A lot of people hoard cash to try to time the market. I knew someone who had diligently amassed enough cash to purchase a home. They told me that they were waiting for the housing market to crash before they bought a house. I told them that if the market were to crash that their job would potentially be at stake. No job = no house. Additionally, do you think that as a first-time homebuyer, they can actually compete with cash-flush real estate investors or experienced homebuyers who are carrying over big cash equity in a hot market? Your home is not an investment—buy when your lifestyle calls for it and you are financially ready.
Not advocating for yourself at your job
Salary increases compound on each other. That means that any pay increase today will be built into every future salary increase. That extra 0.5% or 1% each year might not seem like a ton but compounded over the course of your career it will make a massive difference in lifetime earnings. Even if you plan on switching jobs every so often to get larger raises, every pay increase within the same job becomes the baseline expectation for your next job when the time comes to switch. Assuming that you will not accept a pay-cut in a job change, every $1000 raise you get right now is an extra $1000/yr for the rest of your career, and every raise will rely on that extra bump.
Helping people financially when you are not financially stable yet
There is a good reason why airlines tell you to put your own oxygen mask on before helping others. In personal finance, this is situational, but you often see people helping others financially before they are financially stable themselves. The issue with this is twofold: First, you are most likely enabling them to continue doing what they’re doing; second, what happens when something bad happens to you and you get swept off your feet? Now both parties are going under. It may seem selfish not to help someone who is struggling financially, but if you are barely afloat yourself, then you risk both parties. Achieve some baseline financial security first before you consider helping others. When you have financial security (whatever that means to you), you can help others to a much greater and more meaningful extent than if you were scraping by trying to support more people than just yourself and your immediate household. There are also other ways that you can indirectly help folks improve their financial situation. First, start with financial education and giving them the right resources to learn. Knowledge is power. Second, you can help them increase their income by helping them with their resume or job search. Third, you can be their accountability partner and help them stay the course.
Going to a college or school that is too expensive for your projected income
The student debt crisis in the United States has gotten progressively worse over the past couple of decades due to the rising cost of college and wage stagnation. Unfortunately, a college degree is occasionally no longer worth what it costs. It is important to understand what you can afford for schooling and what amount in loans you can afford after you graduate. This advice is mostly for people who will be taking out loans for college, which most people do. If you are fortunate enough to go to college without loans, this advice doesn’t necessarily apply, but it’s still worthwhile to understand what your projected income is going to be. It is very hard to quantify your expected income. Industry averages are a great start, but they don’t consider your skill level (past internships, grades, etc.), your location, or your negotiating/interpersonal skills. In general, the rule of thumb is to plan to graduate with loans that are less than your expected annual salary after graduation. For example, if you expect to make $65k per year after graduating with your bachelor’s degree, then you should aim to have no more than $65k in student loans upon graduation. Of course, you should aim to have as little debt as possible, but this is the absolute max.
Focusing on monthly payments and not total purchase price
Breaking down large purchases into small monthly payments is a way to spread out the burden of large purchases into more manageable chunks, but it often leads to people buying things that are way too expensive for them to afford. It mostly shows up for car purchases. It’s easy for a salesperson to increase the loan term to reduce the monthly payment. However, not only does this not change the overall purchase price, it also increases the amount that you pay over the duration of the loan due to interest. This has also become an increasing problem with “buy now, pay later” services like Klarna and Affirm, which are embedded in almost every online check-out kiosk. Even Amazon has their own payment plan option. You have the option to finance basically anything, which is not good. It simply urges people to spend more than they should be spending, even if the interest is low or 0%. Having a monthly payment just adds to baseline expenses and increases overall financial risk. There are certain instances when financing something at 0% might be useful, like a powerful laptop that is required for your videography side-hustle, or an unexpected home repair. However, having an adequately funded emergency fund can help you avoid most unexpected expenses. Note that at 0% interest, it is indeed mathematically optimal to borrow money since HYSAs pay more than that, but psychologically, it can easily trap you into growing monthly payments by borrowing at super low interest rates. One way to help yourself not fall into the trap of monthly payments is to match your (low- or no-interest) loan payments with contributions to your investments. If you cannot match those payments, then you should reconsider whether you can afford that purchase.
Taking money out of retirement accounts
Interrupting compound interest is one of the biggest mistakes you can make early in your career. It can be worse than not investing at all, because not only are retirement account withdrawals taxed at ordinary income rates, but you will also owe a 10% penalty on all early withdrawals. You may think that the impact is small because you are so young, but it’s quite the opposite. Recall that missing 5 years of investing on a 35-year timeline decreased the account balance by over 30%.
Taking out home equity
As mentioned in Personal Finance for Young Professionals, there are several ways that you can access your home equity, such as a home equity line of credit (HELOC), home equity loan (HEL), or cash out refinance. It may be beneficial to access home equity to use that cash towards home repairs or other home-related things. It is ill-advised to use this money for basically anything else. A mortgage is already a very long commitment; don’t make it longer by removing (or borrowing from) your hard-earned equity unnecessarily.
Conclusion
These are just a few of the financial mistakes that people often make as young professionals, but as a wise person once said: “Smart people learn from their mistakes. Wise people learn from the mistakes of others.” The list is not comprehensive, so always be wary of your decisions. If something doesn’t feel 100% right, then that is a reason to question your decision and dig deeper into the details. Remember that just because it’s common for people to make mistakes does not make them okay. Just because the average new car costs over $50k (with an average monthly payment of $750/mo and loan term of 5+ years) does not just doing that yourself. Remember that the average American is in severe debt. Do not be average if you can help it.
Comment below with big financial mistakes that you made or almost made, or watched others make!
Personal Finance for Young Professionals 
Leave a comment