Editor’s note: This article was first published in March 2014. Its references to the Spanish mortgage boom and to iPhones reflect 2014.
There isn’t a single subject, from primary school to the end of university, that teaches you how to earn and manage your money intelligently. Even most economists are up to their eyeballs in debt. The website MainStreet asked several personal finance experts to give their view on the worst mistakes people make when it comes to money.
Whether you are 20 and still studying, or 60 and still worried about not having a comfortable standard of living, you are falling victim to many of these mistakes, or paying for the mistakes of the past. Since the original article focuses on the US system, which is different from the Spanish or Latin American one, we are going to adapt those common mistakes to our own system and divide them by decade of life, because financial education mistakes start at school.
From 10 to 20
We split this stage in two, because between the ages of 10 and 16, responsibility for our financial education lies with our parents and the education system, a system that teaches everyone the same way, regardless of whether a pupil has more talent for chemistry or for maths.
We get our children used to following the herd. Most young people can remember how many league titles Real Madrid or Barcelona have won and who the league’s top scorers are, along with a host of other facts that show an enormous capacity for learning, but one that is perhaps badly used. Every teenager in secondary school should already have basic financial knowledge, and should already know the stories of great entrepreneurs and business people. Before they turn 20, our children should have read some of the most basic books on financial education, because it is the only way to whet their appetite for taking on the world. We can’t expect young people to know exactly what they want to do in the future, but if they are clear that they want to earn a lot of money, that doesn’t really matter. And never tell your child that money isn’t important, because you are setting them up for financial “suicide”.
From 20 to 30
If I had known at 20 half of what I know today, I would be rich now. And I don’t mean a few hundred thousand euros; I mean I would literally be a millionaire. At 22 I was earning more money than most adults. I was a young executive in sales, and some weekends I spent more than adults earned in a whole month. Why? Because I could, and because the following month I would receive another good pay cheque with astronomical commissions.
To avoid any confusion, my case is not like that of Turney Duff, the man who made 10 million dollars on Wall Street and blew it on drugs, alcohol and prostitutes. I have never liked drugs or alcohol, and although I respect sex work as a profession, I am not a customer. I simply adjusted my standard of living to my income. I was young and earning a lot of money, and nobody told me that you have to make the most of good times to save, because they tend to end sooner or later.
Not saving, wasting money and credit cards are among the mistakes we make between 20 and 30. It is a time when people like to show off as soon as they earn some money. They like to have the latest technology, buy a new car as soon as they land a job, and the craziest ones take on a lifelong mortgage at the worst possible moment. Nobody explains to them that a mortgage should not take more than 30% of their income. In Spain, many young people have taken on mortgages of up to 80%. Likewise, before buying an iPhone, consider whether you would be better off buying shares in the company that makes it (Apple).
It is probably the best time to save. You have strength and health, so you can work hard at anything while you keep chasing your dream. And it is undoubtedly an ideal age to take risks with stock market investments, especially if the market is at the right point. (Essential reading: 10 money and finance tips to follow before you turn 30.) In that article we explain how to avoid the worst problems with a few simple guidelines.
From 30 to 40
At this age, the mistakes come down to marriage and mortgages. Since the high divorce rate we have today became public knowledge, marriage has become the biggest destroyer of wealth in the world. Statistics say that if you marry at 32, there is a high probability that you will divorce before 40. Needless to say, in Spain, in a divorce involving children, the man is left completely unprotected. A standard separation-of-property arrangement is not enough. Talk to a good adviser in this area about how to protect yourself for when love runs out.
Even so, at this age most people already want their dream home and even a second home for the summer. If they are married, they tend to make the mistake of taking on debt because both partners have seemingly stable jobs, so as soon as one of them fails, or both do, the debts immediately start catching up with them.
The lack of an emergency fund is also common in most families. Remember that every person or family should have an emergency fund that lets them survive for 6–12 months if their income dropped to €0 during that period. (Read: 7 mistakes we make with our personal finances.)
Ironically, when most people get married, instead of being better off financially (since they now have two sources of income), they tend to find ways to be worse off. A lack of planning and not talking about money with your partner usually ends up taking its toll.
From 40 to 50
Continuing with the ironies of financial education, it is from the age of 40 that people start taking financial risks, which, combined with a lack of preparation and financial knowledge, often leads to bad investments. And remember that being reckless with money at 25 is not the same as being reckless at 45, because there is much less time to recover from a bad investment.
This is also the age when people start relying on loans and keep living without a detailed budget or a financial plan. Your 40s are a time to save, both for the children’s university and for your own retirement. Of course, this is also the age when we should already be reaping the rewards of the investments we made in our 20s or 30s.
A high percentage of people between 40 and 50 are paying off some kind of debt at more than 20% APR instead of earning returns of more than 8% a year.
From 50 onwards
From this age on, we reap the rewards of our past planning or pay for the excesses of our past. That is why you should try to start doing things right as early as possible and have a plan from a very young age. Even so, many new business owners have started at this age. It is never too late for anything, but if you start early you put the odds in your favour.
Further reading
- Notable differences between how the rich and everyone else think
- The best books on getting rich are more than 70 years old
Featured image: Steven Pavlov, CC BY-SA 4.0, via Wikimedia Commons.
