March 23, 2022 – Our relationship with money changes as we get older. So do the mistakes that we make.
Every new stage of life brings new financial strategies we need to follow. And at every step, we find new ways not to follow those strategies, costing ourselves money and jeopardizing our security.
Economic and demographic changes ensure that those mistakes aren’t static so that the errors of the current generations aren’t the same missteps that their predecessors struggled to avoid.
Here’s a closer look at some of the biggest mistakes we make, decade by decade, and how to avoid them.
In Your 20s: Playing it too safe
The first entire decade of adult life should be about developing sound financial habits. Many millennials have particularly low financial literacy. They often struggle with independent thinking, decision-making, and risk-taking because they fear making mistakes. Their lack of risk tolerance may stem from their experience of financial uncertainty during their lifetimes, from 9/11 to the financial crisis. Understanding the dynamics of risk and reward is crucial for generating an appropriate return on invested financial capital. I have written about the need to embrace risk (“Risky Business”) and the importance of recognizing it early in your adult life when your time horizon is at its longest.
Studies show that another kind of crucial investment often gets neglected when people are in their 20s: human capital. People in their 20s tend to face the most decisions about investing their time and money in their human capital. Be in a job that inspires you and that makes your effort worth more than the money. Be excellent at what you do. Be voracious in your learning and improve what you can do. Put yourself in an environment that’s fun to work in, where you can respect your colleagues and feel part of a team atmosphere. Decisions made early in your career can have meaningful long-term impacts on future earnings potential.
Be thoughtful about your employment, but not impatient. Impatience can also have negative consequences on future wages. Human capital is developed on the job; it is the experiences you live through every day. Impatient people who switch jobs can miss out on learning experiences that would accelerate their human capital development and improve their chances at salary increases later in life.
In Your 30s: Overwhelmed by Change
More so than in previous generations, the third decade of life is when many people start making huge adult commitments such as getting married, having children, and buying a home.
Typically, with additional financial commitment comes increases in compensation. Many go into this situation with heightened expectations and the desire for an improved standard of living. Your level of wealth, comfort, material goods, and necessities will often define your living standard. However, there is no correlation between a person’s standard of living with their quality of life, which is a subjective term that can measure happiness. The type of home you buy, the car you drive, and the memberships you desire significantly impact your standard of living, but are not the drivers of true happiness. The requirement to support that standard of living might prevent you from the joy of working at a job you love or a partner who prefers to “run the household.”
What’s more, finances are more complicated than in the past. Savings and investing must be in full swing to save at least 15%-20% of your salary. Incurring too much or too little debt could be problematic; learn more in “The Wisdom of Borrowing.” Supporting dependents will require both the purchase of insurance to mitigate the risk of disability or premature death and the establishment of an estate plan for guardians and powers of attorney.
The most significant mistake made by people in their 30s is thinking they have plenty of time in the future to do the things they should be doing now.
In Your 40s: Misjudging big expenses
Suppose your 40s are still ahead of you. Go back and reread the previous sections. If you become aligned in your 20s and 30s, your 40s will be a much smoother ride.
But if you are waking up and reading this in your 40s, it is not all lost. By our 40s, we tend to be about halfway through our working lives—just as more significant expenses enter the picture. These mistakes manifest themselves in four areas:
Your Home: We hear that a person’s home is their most significant investment. There are two reasons that this is not a great strategy: 1) the returns are uneven with the inability to utilize the equity you have, and 2) homes are expensive to operate and upkeep. I chuckle when clients are fixated on low-cost investing, but will spend multiples on lawn care, landscaping, and their pool.
Your Children: Others in their 40s find themselves spending too much on their children. The high cost, especially in the later years, is college. People want to save from the time their children are born, but nobody knows how bright their kids will be or if they are going to want to go to a state university or a small private school. In the earlier years, much of the focus is on extra-curricular activities for the children. It is excellent to invest in your child’s experiences, but be thoughtful about the return they, and you, get for the incredible amount of financial and time resources allocated to the efforts.
Your Employment: Your 40s tend to be the right time to re-assess how you are investing your human capital. Be proactive. Do not let the impetus be your entry into the proverbial “mid-life crisis.” Take control of your career. Save it, change it, go in a different direction. Do not just “hang on” and seek an “early retirement” strategy.
Improve Financial Literacy: This applies to both yourself and your children. The decade of your 40s is the time to be very curious about your finances, as they are becoming more complex from an investment, tax, and estate-planning standpoint. Do not miss the opportunity to understand “How to Teach Your Kids Good Money Habits.”
In Your 50s: The difficulty of catching up
There is a strong interaction you can accomplish between your “current self” and your “future self.” Yes, you will hold a conversation with the person you would like to be in the future. You ask the questions and allow yourself to answer them within your future environment. Read my essay called “Lessons to Help Your Future Self.” As with most things, the earlier you have the conversation, the better and more predictable the outcomes. However, with advances in medicine and more extended life expectancy statistics, have the discussion now!
One nightmare scenario for many in their 50s is realizing that they may not have enough money stashed away for retirement. Adults now live much longer lives than they used to, and it might not be a stretch that your retirement funds need to last 40 years and beyond. Many temptations encourage people to withdraw from retirement accounts early, and sometimes unemployment or other squeezes make it difficult to contribute.
The difficulties can be compounded by lifestyle creep. People in their 50s often develop lifestyles they cannot maintain in retirement. When the kids are gone and college is paid, people tend to kick up their heels and improve their living standards. Once again, the standard of living v. quality of life assessment proposed in your 30s is essential at this stage. Please be clear on the distinction and involve your family in these crucial decisions. Listen to your “future self.”
A different temptation for those who feel ill-prepared for retirement is entrepreneurship. More baby boomers than previous generations are trying to start their businesses, be it a lifelong dream or perceived necessity. This move can bring rewards, such as an easier transition into retirement, but it is often a very dangerous bet. Putting all of your eggs, savings, and investments in your “human capital” requires a lot of thought and analysis. Unless you have already reached financial freedom and you have the capital to put to risk in a new venture, DO NOT start a new business on a whim. Sometimes human capital—the skills we have developed throughout our careers—may not be as valuable in the market as we think, making a professional business plan necessary.
In Your 60s and beyond: Not delegating
As we get older, our personal balance sheets grow more complicated. Moving your focus from accumulating capital for the long term to preserving your money for your remaining time is a difficult transition. Our analytical abilities can’t keep up with the complexity. Critical decisions to be made include:
- Can I retire?
- How do I invest my retirement funds to make them last?
- How do I withdraw money from retirement accounts to minimize taxes?
- Should I consider buying an annuity?
- When should I take my social security?
- Should I consider long-term care insurance or a reverse mortgage?
- What are the proper health care coverage for me and my partner?
Every individual in their 60s and beyond will face these questions. Please make no mistake, these are difficult questions to answer, and their interrelationships make it more like solving a puzzle.
If you are reading this essay in your 20s, you have an opportunity to see what might lie ahead for you. You are now in control and can take the appropriate action. However, my experience with clients indicates that most readers will be in later stages of life and might not have had the advantage of putting a plan in place during the early years. But do not despair. While the best time to plant a tree was 20 years ago, today’s the second-best time! Please seek professional help to guide you through the remaining decisions in your life.
As Financial Life Guides, we take a comprehensive view of our clients’ finances and work closely with them to make sound decisions. We are fortunate to work with some of their children, who get a broad perspective and can establish good money practices at an early age. We are all prone to mistakes, regardless of our generation. Without mistakes, there would be no learning. But there is something to be said for learning from the mistakes of others!