In each decade of your life, you have the opportunity to make financial decisions that can help or hurt you in the future. But it can be hard to think ahead, especially when you’re first starting out and short on cash. So many of us spend our later years scrambling to play catch-up for the money mistakes we made in our youth.
Even if you invested wisely in your 20s and 30s, new pitfalls present themselves at later stages of life, as our circumstances change. With greater financial security comes the temptation to make big purchases. Spending money on items with big price tags can reap financial rewards or drain your savings. It’s all about the choices you make.
Kelly Crane is President and CIO of Napa Valley Wealth Management. He has seen it all during his more than three decades as a certified financial planner. He shared with us some of the biggest money mistakes that people make by decade.
Childhood: A missed opportunity for education
“We have a general dearth of financial education for our youth in America,” Crane said. “It’s very likely that people graduate from college without any financial planning education and often not able to balance a checkbook.”
It’s up to parents to change this. “Parents can help their children handle the concepts of earning and saving and that money comes from labor or investments,” he said.
Money can be an ephemeral contact for kids who have little or no physical contact with it. Early financial education, Crane said, “is more important now because we’re not using cash.”
By the time kids reach their teens, they may have a part-time job and earn some of their own money. But they need a greater understanding of what it takes to live, or they may be in for a rude awakening when they strike out on their own.
“They may feel like they’re rich when they make $1,000 a month,” Crane said. “If you know they need $2,000 a month to pay for rent, food and college and they’re only making $1,000 a month at their job, they’re only covering half the cost.” It’s up to parents to make sure teens understand the true cost of supporting themselves.
And it’s never too early to start the good habit of saving. Crane says that our money personalities – whether we’re savers or spenders – emerges early.
20s: Too much school, too little saving
The 20s are when we think about graduating from college and moving out on our own. For millennials, this transition is often delayed. According to Crane, this can cost you down the line.
“If you take one extra year of college, it could cost you as much as $289,000 over your career,” Crane said. This assumes tuition and living expenses of $50,000 for that extra year. In addition, if you had started work and saved $7,500 from your salary, with compounding interest that would grow to $239,000 by the time you retire.
To get a jump on college graduation, he suggests taking extra classes or starting college classes while you’re still in high school.
Another college mistake for many people is their choice of majors. “When you’re interested in something, you could choose the degree or the path that pays less than something related that will give you a better lifestyle,” Crane said. You can still follow your passion; just follow it towards the career option that has a higher future earning potential.
Even if you do graduate on time and start working right away, many people in their 20s don’t sign up for a 401k with employer matching right away. Crane gave an example, assuming a starting salary of $50,000. If you put 10 percent of that into your 401k, your employer would match $2,500.
If you miss out on saving $7,500 that first year, Crane said, “this could cost someone in their 20s as much as $2 million dollars by age 65.” In fact, the exact amount, if your 401k earns an average 8 percent return is $2,123,264 after 45 years. Early investments add up.
30s: Misplaced spending
By the time you’re in your 30s, you may be earning enough to have some disposable income. How you spend – or don’t spend – that money is crucial.
It can be tempting to spend your hard-earned cash on something fun, like an RV, boat, timeshare, or a fancy car. Don’t do it.
“They tie up a significant amount of your income that could be invested,” Crane said of non-appreciating assets. These purchases can also increase your expenses. For example, the costs of boat ownership don’t end with the purchase price. You’ll have to pay for docking and storage, maintenance, fuel and insurance.
There is, however, some big-ticket spending you should do in your 30s that you might be missing out on.
Millennials are waiting longer to buy their first house. Crane noted that this means you’re paying rent instead of investing in a home. Not buying a home also means you extend the timeline to finish paying your mortgage off (if that’s your objective). In addition, you’re missing out on the mortgage interest tax deduction which, Crane noted, subsidizes your home purchase.
If you live where real estate is expensive, you may need to get creative to buy a home. He suggested renting rooms to friends to help pay your mortgage, getting help from your parents, buying a small starter home, or looking for down payment assistance from the VA or local first-time homebuyer programs. If you wait too long, you could lose out on the chance to buy, if you live in an area with rapidly accelerating home prices.
Crane suggested one more large expenditure that’s a good investment that many people in their 30s miss out on: an advanced degree. An advanced degree can pay for itself many times over in your increased earning potential.
“Think about making $25,000 less per year,” Crane said, over the course of your career. That adds up, and the salary disparity may grow over time. He noted that engineers earn $20,000 to $30,000 more per year when they have a Master’s degree rather than just a bachelors.
40s: Not enough saving and investing
The 40s are a time in life when people tend to buy more status symbol items. “Increasing your fixed expenses by leasing cars or buying a big house ties up more of your disposable income which could mean less savings,” Crane said.
Instead, the 40s are a decade when you should be focused on saving for retirement. According to Crane, there a couple of big money mistakes that many people make.
One mistake is failing to increase your savings with every salary increase or bonus. “Imagine your salary is going up 3 percent a year on $100,000 and you saved that whole increase,” he said. If you started investing an extra $3,000 a year at age 40, with an average 8 percent return, that would give you $516,950 by the time you turn 65.
Another problem is that many people aren’t aggressive enough in their investments. This is the time when you “really should dial in and be more aggressive,” according to Crane. “You have at least 20 years to retirement, so you can afford to go through a market cycle.”
This mid-point in your career is a good time to make riskier investments that come with a higher rate of return. But many people have what Crane calls “lazy money” on their balance sheets: investments with a low rate of return.
50s: Too much for the kids, not enough for you
In your 50s, the demands of family can get in the way, just as you should be taking your retirement savings more seriously, according to Crane. Many people find their finances strained by college tuition and other expenses for their children.
“It is a balancing act between what might be reasonable and what’s not reasonable,” he said. If you have a modest income, don’t take a second mortgage or borrow hundreds of thousands of dollars to put a child through college, especially if it will to put your retirement in jeopardy.
In this decade of life, you could be in trouble if you don’t flip your investment strategy to be more conservative. “Have enough money in safe investments to weather a stock market crash, real estate market crash, job loss, or disability,” Crane said. “The last thing you want to have happen is to have this great high-performing portfolio and then the stock market crashes or you lose your job and now you’re liquidating your portfolio at 50 cents on the dollar.”
Not saving enough for early retirement is another mistake people make in their 50s. Crane noted that, if you want to retire at 60, you need to start planning way before age 59.
“Normally, people in their 50s are in their peak earning years, which tends to allow for more discretionary expenses and lifestyle expenses that may not be sustainable if they retire early,” he said.
Many baby boomers have found themselves forced into early retirement. If you get laid off in your 50s or 60s, you could have a hard time finding another job. Early retirement may be your only option. If you haven’t planned for it, your lifestyle could take a big hit.
60s: Retirement planning fails
In their early 60s, many people make the mistake of leaving their jobs before they have saved enough to cover their expenses in retirement, according to Crane. “You’re in your peak earning years and if you voluntarily quit early, it could be enough to put you upside down for the rest of your life,” he said. “If you’re retiring early, you want to have some fun and enjoy your health.” Instead, you could find yourself with zero discretionary income in retirement.
Another mistake is paying too much in taxes. Because your highest-earning years are probably in your 60s — right before you retire — your tax rate is also highest during these years. “Your investment income is taxable at your highest marginal rate,” Crane said. You’ll pay a much lower rate after you retire, so a strategic plan that includes tax-free investments is essential.
Another mistake that Crane sees many older people make is failing to diversify their concentrated stock positions from employee stock options.
“A lot of great wealth is achieved through company stock from your employer,” Crane said. “It needs to be diversified before it gets to the point where that one stock controls your future.” You never know when a seemingly solid stock can have a sudden drop in value. You can’t afford that in your 60s.
70s and older: Can’t outrun inflation and debt
“There’s this myth that you should shift your whole portfolio the day you retire to bonds,” Crane said. “You still need the inflation-adjusted return. Especially in today’s low-interest world, it’s very difficult to earn an inflation-adjusted return with bonds alone.”
“One of the big problems that people have is they have too much fixed income,” he added. This could be bonds, a pension, or Social Security income. “The problem is they really need to be planning to live into their 90s,” he said. He noted that there’s a 50 percent chance that someone aged 65 today will live to be 92.
So not only does your retirement savings need to last longer; it also needs to increase with inflation. Crane offered an example: If your living expenses are $3,500 a month and inflation is steady at 3 percent, your living expenses will increase to $5,452 per month by the time you’re 80. That’s a more than 50 percent increase.
Failing to take Social Security at age 70 is another mistake. “Your Social Security benefits don’t increase beyond this age, so there’s no reason to wait,” Crane said.
Perhaps the toughest issue is going into retirement with too much debt. Barron’s reported that 70 percent of people aged 65 to 74 have debt. That’s double the number who carried debt into retirement in 1992.
“This creates a lot of financial pressure at a time when you need to be lean with your fixed expenses,” Crane said. “People should aggressively consider paying down their debt in their peak earning years.” Even better, avoid incurring new debt once you are 10 to 15 years from retirement.