The Three Biggest Financial Mistakes Before 30

The financial decisions you make before you turn 30 will often have the biggest and farthest-reaching consequences of any you make in your life. Therefore the choices, judgements and mistakes you make here will not only shape your future successes but also your failures and disappointments. In this post, we will be focusing on the three areas in which you are likely to make the biggest financial mistakes before 30.

Although the path to financial independence is suitable for any person regardless of their age and current monetary state, just being young can be an incredible advantage because it allows us to leverage our time to maximise the effects of compounding.

Imagine the path of your life as a tree where the:

• Lowest and thickest branches represent the choices you made early in your life
• Higher and thinner branches represent the choices you made later in life.

To show you just how powerful it is to work towards financial independence at a young age we will look at four separate individuals. These four began to save £500 a month at different ages into an index fund like the world all cap. They earn an average of 8% a year (historical average) until they are 65. The results are as below:

• 20 Years old = £2,637,270
• 30 Years old = £1,146,941
• 40 Years old = £475,513
• 50 Years old = £173,019

Because you are young, your decisions have so many future decades to grow, develop and amplify, and therefore you must set yourself up so that these decisions allow future prosperity. However, if you make the following three biggest financial mistakes before 30 you can expect future hardship, difficulty, and pain.

In this post we will be covering:

• Mistake 1 – Housing
  • Renting
  • Homeownership
• Mistake 2 – Debt
  • Consumer debt
  • Student loans
• Mistake 3 – Car/vehicle
  • Buying a new car
  • Leasing a new car
• Conclusion

Housing: #1 Biggest financial mistakes before 30

The first of the biggest financial mistakes before 30 that you can make revolves around housing and the choices you make in this domain. This will likely be your single biggest expense and therefore it stands to reason that your choices here will greatly affect your path to financial independence.

For this post, ‘housing’ will include:

• Rent/mortgage
• Property taxes such as council tax
• Utilities such as gas, electric, and water
• Home insurance
• Other possible fees such as ground rent

Renting – Housing Part 1

I’m sure the majority of us have heard that renting is “throwing money away” but I think it is extremely important that within this post we are reasonable, rational, and objective. There are many occasions, times, and situations in which renting is either the best option or the only possible option and therefore instead of denouncing renting itself as a mistake (which would be completely ignorant), we will focus on the particular blunders that can be made.

Living alone

Living alone is likely one of the biggest financial mistakes before 30 that you can make. Even if you choose to live in a one-bedroom apartment you can expect to pay extra for the privilege of living alone. Below we will compare the rental prices for different properties in Bristol, UK.

• One bedroom = £860 per month
• Two bedrooms = £1,100 a month or £550 each
• Three bedrooms = £1,200 a month or £400 each

From this, it is pretty clear that it is far more cost-efficient to share the rent of a larger property. As well as this you will have the advantage of splitting other costs like council tax (property tax for our American friends), heating/electricity and internet bills.

If you do not have a group of friends/colleagues that you already know and can rent with then you are usually able to rent a bedroom in a shared house. Find two friends and see your accommodation costs cut in half.

Choosing an apartment/house outside of your budget

One of the most obvious mistakes that can be made when selecting rental accommodation is simply choosing a property that is unrealistic regarding your budget. The below table should help give you a ballpark idea of what is good and bad concerning your salary.

For someone who wants to make real progress towards financial independence before they turn 30, I think you must spend less than 25% of your net income on housing. Someone who earns £2,000 a month in net income (£30,000 a year before taxes) should therefore be looking to spend less than £500 a month on housing.

Some of the reasons that a property may be outside your price range are:

• Larger than required
• Within an expensive neighbourhood
• Built/renovated to a high specification
• Has additional features such as seafront, balcony, ensuite, high ceilings or is a listed building
• Furnished for you with high-end furniture and appliances

Unfortunately spending less than 25% of your income is not always possible and therefore some caveats are:

• You are currently a student and therefore have minimal earning potential
• You are an apprentice/intern and your salary will increase shortly
• It is the cheapest option in a high cost of living city and you cannot move to another area – if this is you then you need to find a way to increase your income rapidly.

Not understanding all associated fees and expenses

It is critically important that when moving into new accommodation (especially if this is your first time renting) that you understand exactly which expenses are your responsibility and which are the landlords. Below are common examples depending on whether you rent the entire property or just a bedroom:

*Ground rent is a fee paid by the leaseholder to the freeholder. For example, the owner of the apartment pays a fee to the owner of the apartment building – usually £100-200 a year and is used for maintenance of hallways, access points, roofs etc.

Please be aware that the above is just a rough guide and you must check your contract for your responsibilities.

Make sure that none of the above catch you by surprise when you sign a lease agreement. The last thing you want to do is find out you have to pay an extra £200 in bills/taxes after you commit to a 6 or 12-month agreement.

Living with suitable housemates

Do not, I repeat, do not overlook your housemates if you choose to rent a property with others. This is especially important when you all share one contract (as opposed to only renting a bedroom) as you are all responsible for damages, accidents and disturbances. Having an inconsiderate housemate can be a nightmare to deal with and you do not want to lose half of your deposit because he/she put their foot through a wall when drunk.

Unfortunately, financial issues are not the sole problem of living with a selfish housemate and you should consider:

• Complaints from neighbours may lead to you being kicked out
• Lack of enjoyment and fun whilst within the property
• Conflicts between yourself and them
• Feeling uncomfortable in shared areas such as the kitchen or lounge
• Lack of sleep (parties, loud music etc.)

Deposits

I’ve been a landlord for around 8 years and I sleep easily at night because I know that I have always treated my tenants fairly and honestly without taking advantage of their situations. I like to think that this is why I have never had an issue with any tenant as it has always been mutually beneficial for us to maintain a solid relationship. Unfortunately, I understand well that many landlords and rental agencies (I do everything myself) do not have the same view and therefore you must take measures to cover yourself.

• When moving in it is important to take photos and videos to make sure you have evidence to back up any later claims
• If you find damage then report it or you may be blamed at a later date
• Make sure that your contract has an itinerary and check everything within the property.

Finally do not be afraid to stand your ground as often landlords will make claims in the hope that they are not challenged. Wear and tear and damages not caused by yourself are absolutely the landlord’s responsibility and they should be held accountable for these.

Similar to when you arrived make sure you document (photos and videos) the condition of the property when you leave. Remember that it’s very hard to gain evidence later if you no longer have the keys or access rights.

Homeownership – Housing Part 2

Homeownership can be one of the best financial decisions of your life or one of the biggest financial mistakes before 30. Some common homeowner mistakes are:

• Buying at the very limit of your budget
• Relationship breakups
• Negative equity/overpaying
• Non-diversification of net worth
• Skipping a home inspection/evaluation/survey

Buying at the very limit of your budget

If you buy at the very limit of your budget then you can expect money to be tight each month. Although some of this money is being invested into the property it leaves you vulnerable to emergencies or life changes. Are you still going to be able to pay the mortgage (and your other bills) each month if you or your partner lose your job, you have a child, or your skills are devalued?

Breakups

Breaking up with a partner often spells financial devastation and in a large percentage of cases, this is due to shared homeownership. If you break up and need to sell the property it will cost you in the following ways:

• Buying fees – although technically not lost as you bought the property you probably now wish you had never spent this money
• Early repayment fees – if you are on a fixed-term mortgage there will almost certainly be a penalty for early exit of your contract (you pay back the mortgage when you sell the property)
• Selling fees – often not huge in the UK but requires you to move all of your belongings out
• New house buying fees – it’s likely you will decide to buy a new smaller house and therefore you need to pay the costs associated with this

All of the above will add up to thousands of pounds whilst taking up large amounts of your time. If possible, I recommend renting with your partner for a period of time before committing to buying a property together.

Negative Equity

Negative equity occurs when the value of your house drops to a level at which the deposit no longer bridges the difference. If you bought a house with a 10% deposit and it drops in value by 15% you are in negative equity. This is a very perilous position to be in and if you have to sell the house (lose your job etc.) it can force you into bankruptcy.

This often happens in a red hot property market because FOMO (Fear Of Missing Out) takes over and you make decisions you may not have usually done. I’m sure many of us have heard stories lately of properties being sold for 10-20% above their asking price.

Non-diversification of net worth

Often you will hear the advice that paying off your home is a great financial decision. This is sometimes true but is certainly not a blanket statement and therefore is often not the best option for many of us. If all of the money you own is tied up in your house you are very vulnerable to any setbacks or emergencies. Instead, you should try to diversify by investing in the stock market and having a large emergency fund.

Skipping a home inspection/evaluation/survey

The cost of an inspection is dependent on the size of your property, the location and the type of survey you require but is usually between £400 to £1,425.

This saving is certainly nothing to be sniffed but avoiding it could lead to financial peril. Home sellers are generally tight-lipped about issues or problems the home suffers from (as it will lower the sale value) and therefore having a professional complete a survey can often be worth its weight in gold. All of the below could cost you thousands down the road and will likely be noticed by an experienced surveyor:

• Structural damage (this has the potential to cost tens or hundreds of thousands of pounds)
• Plumbing issues
• Poor ventilation
• Mould/damp
• Leaking/damaged roof
• Electrical issues
• Pest infestation

Debt: #2 Biggest financial mistakes before 30

Oh boy, oh boy can debt be one of the biggest financial mistakes before 30. This is something that can absolutely derail you regardless of your job title, position or even your income. If ignored, disregarded or not understood, what once seemed innocuous and insignificant can become a fire breathing demon that can react complete havoc on your life and those close to you. It absolutely must not be underestimated as falling into the trap of high-interest debt will cripple you financially.

The reason debt can be so dangerous is for the same reason that investing at a young age is more powerful:

“Compound interest is the interest on a loan or deposit that accrues on both the initial principal and the accumulated interest from previous periods.”

Investopedia

Compound interest may not seem a lot initially but over many years it will have a huge effect as can be seen below:

The chart above shows how compound interest grows each year until it is doing nearly all of the heavy lifting for you. In the last year, the interest alone is £412… more than the total earned using simple interest.

So how does this tie into the danger of debt you may ask? Debt with interest is essentially the above but working against you (for the bank) and even worse the interest rates are often much higher than you can expect to earn from investments. A common credit card interest rate is around 20% meaning that if you owed the bank £10,000 and didn’t repay it you would owe:

• £72,683 after 10 years
• £528,275 after 20 years
• £3,839,640 after 30 years
• £27,907,480 after 40 years

Consumer Debt – Debt Part 1

Consumer debt is generally categorised into one of the following (and has an average interest rate of):

• Credit card debt – 21.46%
• Bank loans – 7%
• Finance (cars, furniture, gadgets, appliances etc.) – 5%

Consumer debt is usually due to one of two reasons which are:

• Living above your means
• Being unprepared for an emergency

Thankfully if you make the correct decisions throughout your life you can easily avoid both of the above. Consumer debt has the potential to be the worst of all the biggest financial mistakes before 30 that we have covered in this post because of the high-interest rates and its ability to snowball with compound interest. Also the worse your credit rating, the higher interest rates you will be offered.

Living above your means

The first reason most of us get into debt is that we want to live a higher quality lifestyle than we can afford. This desire leads us to excessive spending and paying for it with either a finance arrangement or a credit card. Unfortunately, this lifestyle will only last for so long before it comes back around to bite us. It may seem easy at the time to meet the minimum requirements of your credit card or only pay £30 a month for your new TV but over time these will build and build.

Fortunately, the simplest way to avoid living above your means is to:

• Understand your income
• Budget and know your expenses
• Only spend discretionary income on non-essentials like gadgets and trips to the pub.

If you do the above then there is no chance that you will end up with huge amounts of consumer debt by living above your means.

Rectifying an emergency

It’s very possible that you ended up with consumer debt because you were hit by an emergency that you did not expect. Common examples of this are your car breaking down or your roof leaking. Many people will just put this down to bad luck and argue that there was nothing they could have done to prevent this debt. They will believe that the only way they could have fixed the problem is by using a credit card or taking a loan from the bank.

However, personally, I believe that this is untrue and is simply the result of poor financial management. One of the first steps of any serious and healthy financial plan is to set aside an ’emergency fund’. This emergency fund will usually be able to cover 3 to 6 months of expenses and is designed to allow you to cope with an emergency without resorting to debt. If you want to learn more about emergency funds then it is covered in How to go From Broke to Financial Independence: 12 Steps that Anyone Can Follow

Unfortunately, there are occasions in which your emergency fund simply will not be large enough and debt may be your only option. I know of a person who had to remortgage their own house to help rebuild their parent’s home because it was seriously damaged in heavy flooding and not covered by insurance.

Luckily the above are rare and emergency funds will bail you out of 99% of difficulties. If not then the higher your net worth the better.

Student Loans – Debt Part 2

It would be absolutely wrong to suggest a sweeping statement that all students loans are a financial mistake as they offer opportunity, hope and potential freedom to so many people. Without student loans, the current system in the UK would mean that only the rich or those with scholarships could afford to go to university. As this would therefore result in many being unable to pursue their dream careers we should understand that for many student loans are tremendously valuable.

Student loans are repaid by the debtor once they begin to earn above a certain salary. There are exceptions depending on your loan and when you went to university but generally, you pay 9% of any income you earn over the agreed threshold. Student loans usually cover your tuition costs as well as living expenses. Generally, students (and ex-students) are on one of the following student loan plans:

Finally, 30 years after you’re due to start making repayments your loan will be cancelled regardless of how much is still owed. This means that if you never earn over your loan threshold you will not have to repay a penny. Because of this it often does not make much sense to overpay your loan early but this is often dependent on your plan type, income level and likely future earnings.

For this blog we will focus on mistakes that you need to try to avoid when attending university and getting a student loan:

Not maximising grants

Many universities offer financial help to students to meet certain criteria. Usually, this is for students from low-income households but other reasons apply. Other grants can include:

• Disabled student allowance
• Childcare allowance (if you have a child and you are at university)
• Parent’s learning allowance
• Adults dependents (if you have an adult who depends on you financially)
• NHS – if you’re studying medicine, nursing or dentistry you may be eligible
• Social work – possible if this is your line of study
• Teacher training – the government is offering grants in the hope of tempting more of us to become teachers.

Scholarships

Scholarships pay for a percentage of or all of the tuition costs and attract the top students from around the world. The best scholarships will also cover living expenses. If you can secure a scholarship then the size of your student loan will shrink hugely.

Not living the ‘student lifestyle’

As a student, you should love being a student and understand that it’s okay to not be wealthy. Never feel embarrassed about buying cheap food and avoiding cocktail bars; instead embrace pre-drinks, budgeting, free trips to the beach and all the student discounts you can find.

If you try to finance a higher quality of living with a credit card expect serious pain ahead.

Get a job

If possible find a job (local area or online) that you either enjoy or teaches you new skills. This is money that you can use to build an emergency fund or set aside for when you have to hit the big bad world after education.

Car: #3 Biggest financial mistakes before 30

Cars are convenient, cars are useful and more importantly, cars are essential for many of us. However, spending crazy amounts of money on them can become one of your biggest financial mistakes before 30. The decisions you make regarding the vehicles you choose to drive are so great that I dedicated an entire blog post to understanding the issue. The post can be read here but the key points are summarised below.

Unless you are earning huge sums of money in your 20s buying or leasing a brand new car will severely disrupt your path to financial independence. The below graph shows you the key differences between sensible car ownership and reckless with the following assumptions:

• The difference in money from the most expensive option is invested in the stock market at a 7% average return
• The car in question is a VW model golf
• The value of the old car is subtracted from the cost of the new car

Case Study

* Person A = Purple, Person B = Blue, Person C = Yellow, Person D = Green, Person E = Orange

The average costs and monthly investments are as below:

If you can save £242 a month just from driving an older car then what could have been one of your biggest financial mistakes before 30 may just turn into the best one. Repeat this every 10 years and continue to invest the difference and you can expect the following:

• 20 Years Old- £0
• 30 Years Old – £42,925
• 40 Years Old – £129,190
• 50 Years Old – £302,553
• 60 Years Old – £650,954

I know that I would (and do) rather drive an older car around for my life if I knew the real consequences of this choice and how it will give me so many additional options in the future. Perhaps you would use the extra £300k to retire at 50 instead of 65?

Conclusion

Hopefully from reading this post you will understand the decisions that will drive you on a path toward wealth early in your life. Most of us have fallen guilty of at least one of these biggest financial mistakes before 30 and it is important to realise that all of these situations can be remedied if you choose to do so and commit.

We will now recap each point with a brief explanation:

Renting – Housing Part 1

• Living with friends, colleagues or strangers can often halve your housing expenses
• Choosing a property that you will struggle to afford will leave you ‘house poor’ and unable to build your net worth – aim to spend less than 25% of your net income
• Not understanding all associated fees and expenses – read your contract and be certain what is your responsibility to pay for before signing any lease
• Living with suitable housemates – Don’t lose your deposit or feel uncomfortable in your own home because you have housemates that you do not get along with
• Look after your deposit – take pictures and document the condition of the house when arriving and leaving. Don’t fall victim to unscrupulous landlords.

Homeownership – Housing Part 2

• Don’t buy at the very limit of your budget – this will leave you ‘house poor’ and unable to build your net worth – aim to spend less than 25% of your net income
• Minimise the chance of break-ups – living with someone is difficult and therefore it is often sensible to test your compatibility in rented accommodation before committing to buying together
• Don’t overpay – Try to avoid FOMO (Fear Of Missing Out). If the housing market dips you could end up with a mortgage bigger than the value of your property.
• Diversify your assets – Don’t have your entire net worth tied up in your property. Investing in the stock market and having an emergency fund will make you much more flexible and resilient to changes.
• Never skip a home inspection – buying a house with previously unseen fundamental problems could cause you tens of thousands of pounds in the long run

Consumer Debt – Debt Part 1

• Avoid living above your means
  • Understand your income,
  • Budget and know your expenses
  • Only spend discretionary income (what’s leftover) on non-essentials like gadgets and trips to the pub
• Have an emergency fund – an emergency fund of 3-6 months of expenses will prevent you from falling into high-interest debt when disaster strikes
• Read this post on lifestyle inflation

Student Loans – Debt Part 2

• Understand your loan including the repayment threshold and the interest rate. Read more here
• Maximise grants – you may be eligible for governmental or charitable grants. This is free money and should be grabbed with both hands
• Look for scholarships – universities will often offer scholarships to some of the best students. Find these and apply.
• Embrace the student life – It’s okay not to be wealthy, don’t pretend to be something you’re not by racking up credit card debt
• Get a job – if possible find a job that you either enjoy or teaches you new skills.

Sensible Car Ownership

• Buy a used car
• Keep and use the used car for a long period of time
• Invest the difference in the stock market
• If you buy a 10-year-old VW Golf, drive it for 10 years repeat, and invest in the stock market you can have £650,954 more after 40 years than someone who buys new every 3 years.

If you are currently making any of the above biggest financial mistakes before 30 then you should absolutely consider rectifying these misjudgements if you want to build towards financial independence and freedom.

In the comments below let me know what else you consider to be one of the biggest financial mistakes before 30.