5 financial lessons I wish I'd known in my 20s. By David Simon. Body and Soul Finance Expert.
Written and accurate as at: Oct 06, 2015 Current Stats & Facts
My 20s were filled with fun and optimism. I went from being a full-time student to having a full-time job, earning real money. I remember seeing my first pay cheque and feeling a sense of true independence. I also felt as if the money didn’t belong in my bank account, and had to be spent on the latest pair of Air Max. Saving for something a lifetime away was the furthest thing from my mind.
I don’t have any regrets, but I admit that things would have been easier if I’d slipped some cash dollars into something more productive than upgrading my collection of unused sneakers. So, if I had the chance to ride in the DeLorean and go back a decade what would I have done differently? Here are five lessons that hindsight has taught me.
Lesson 1: Set up a savings snowball effect
Unlike simple interest, compound interest occurs when the interest paid is added to your investment. This is effectively earning interest on interest and the more often this can occur, the better off you’ll become. The results of this can be staggering.
If you were to set aside as little as $100 each week from the age of 20, the investment could grow to more than $200,000 by the time you were 40. Delay this strategy until you reach 30 and the same investment would only be worth $70,000.
Lesson 2: Dig out of debt before you invest
Money saved by not having a personal loan or credit card is generally better than the return you can get by investing that money. If you were to make the minimum repayment of $203 per month on a $10,000 credit card, the interest would accumulate to more than $26,000 of interest costs. Simply doubling the minimum repayment amount would reduce these costs by almost $23,000.
Lesson 3: Support diversity
In the long-term (about seven years or more), investments in assets such as shares and property have generally done better than other more secure investments such as savings accounts. One of the biggest strengths of being in your 20s is time, and you can afford to take on more risk than someone approaching retirement, for example.
Putting together a diversified investment plan can really pay off. So seek professional advice, determine an amount you can afford to invest and go for it.
Lesson 4: Balance your budget
Set a goal such as buying a home or taking that dream holiday. Work out the cost of your goal, then review your spending pattern, reset your budget and put a plan in place to achieve it. Use the same disciplined process you would with a fitness or dietary plan. It will take time before you begin seeing results, but the wait will be worth it.
Lesson 5: Choose life experience over quick cash
I often see people in their 20s fall into roles they weren’t educated for, lured by big money. Realise that the experience gained by taking the lesser-paid job can position you to leverage your skill set later on and, in turn, substantially increase your earnings.
Set yourself a limit such as two to five years to learn and gain experience as a junior so you can give your career good progression and capitalise on the investment you’ve made with your study.