There are money mistakes and then there are rookie money mistakes. There’s nothing wrong with making mistakes, it’s how we learn. And rookies, or newbies, are expected to make mistakes. But if we can avoid mistakes by learning from others, all the better.
What Is a Rookie?
A rookie is someone new to something. In the major sports, a rookie is someone in their first year of playing. A baseball player called up from the minor leagues, a football player just drafted out of college, a basketball player drafted last year, etc. A rookie in money is someone new to saving, investing, and the major financial principles like paying yourself first, automating your income, avoiding consumer debt, and much more.
Money Mistakes
Anyone can make money mistakes; you don’t have to be a rookie to do that. I still make money mistakes, but they are much less frequent than when I first started out. Some of my biggest mistakes have led to my biggest growth, which I consider to be a good thing.
In fact, if I hadn’t made money mistakes, I never would have written my book Cash Uncomplicated or started this blog. So I’m grateful for this mistakes that led to bigger and better things. Of course the lessons were tough, but worth it.
The idea with mistakes is that we make them, learn, and hopefully avoid repeating. The nice things about mistakes is that we don’t have to make them to learn from them. You can learn from my mistakes, I can learn from yours, you can learn from a friend, etc.
Rookie Money Mistakes
Rookies are expected to make mistakes. They are brand new-whether it be in a sport, business, money, or anything else in life. It’s unrealistic to think that someone is going to walk out their front door and immediately become a star at work, on the ball field, or with their personal finances.
The idea with this post isn’t to completely eliminate all rookie money mistakes, but to inform and help minimize. Some of the topics in this week’s post are things I had no idea about when I was a money rookie. If I had known about them I wouldn’t have made them, because they all seem simple enough in hindsight. But that’s all in the past and there’s no purpose to look back other than to learn.
Number 1: Falling Into Lifestyle Creep
Number one on the list of rookie money mistakes is falling into lifestyle creep. This is something I did, as have countless other people. The easiest example to give is someone fresh out of college who gets their first “real job.”
The recent graduate is used to living like a college student. Doubling or tripling up in rooms, used furniture, hanging out with friends instead of lavish vacations, etc. Something happens to the recent graduate though.
They go from living like a college student to suddenly wanting nice things, a more expensive apartment, and frequently a new (or newer) car. There is nothing wrong with wanting nice things, but there’s also no rush to jump into major expenses.
Their income is up from the “real job” but expenses are also way up, creating a net gain of near zero. Then as this person advances in their career and/or makes more money, the lifestyle expenses go up. The moderately priced car is traded in for a luxury vehicle, the nice apartment is traded up to a luxury condo, evenings out turn into a couple hundred dollars.
Many people follow this pattern and the net result is living paycheck to paycheck and the inability to get ahead financially. Even though wages have significantly increased, so have living expenses–leaving little room to save and invest. This is classic lifestyle creep and nobody is immune to it.
Number 2: Not Automating
Not automating is one of the rookie money mistakes I made, and a mistake that millions of other people make as well. Automating keeps things easy and simple. The work is done once, updated every now and then, and that’s it.
Automation is almost so simple that it seems too good to be true. Set up an investment account that automatically takes monthly contributions and live your life. No need to tinker with it or get too complicated. Keep it simple and automate a certain percentage of your income every month.
Related: Money Buckets: How I Allocate My Monthly Income
Number 3: Paying Yourself Last
Next on the list of rookie money mistakes directly relates to number two on the list. And that’s paying yourself last. When you pay yourself last, it usually doesn’t happen. Or it happens at a very reduced rate.
Instead, pay yourself first. It’s a guaranteed way to pay yourself a percentage of your income every month, ensuring you get ahead financially. Paying yourself first via automation is even more powerful because it takes the guesswork out of it.
At the start of every month, pay yourself 10 percent, 20 percent, 30 percent, or a higher amount if you can. I recommend at least 20 percent, but everyone’s situation is different. It becomes like clockwork-first of the month and a percentage of your income goes straight to an investment account.
After a few months, you’ll learn to live off the rest of the money without missing it. Nobody said it won’t be challenging, but anything worth doing has its share of challenges.
Number 4: Getting Into Consumer Debt
Consumer debt is one of the biggest killers of wealth. Unfortunately, it’s all too common, especially with young people. Put a few items you can’t afford on the credit card, pay the minimum, open up a new card and repeat the process. Officially putting that person in the consumer debt cycle.
It becomes almost impossible to get out of because someone bought something they couldn’t afford in the first place. Then tack on 20 percent or more interest–and it’s even more unaffordable. Add to that late fees, and it’s an incredibly difficult hole to get out of.
Consumer debt is worse than zero. It’s a hole and you have to climb out of it just to get to zero. A very tough position for anyone to be in who wants to generate long-term wealth and security.
Number 5: Car Payments
Car payments are a type of consumer debt that is so prevalent that I thought it deserves its own category. How many people have you heard of who immediately after getting a new job or promotion buy a car with expensive payments? The old car is traded in for a new (or newer) model with payments of hundreds of dollars per month.
According to this article in Bankrate, the average monthly car payment for a new car is $667. For a used car it’s $515. That’s hundreds of dollars per month that could be invested or used to save up for a new car with cash.
I have two big issues with car payments. Number one is the obvious, which is the interest paid on the loan. Instead of a car costing $30,000 it costs $30,000 plus a few thousand in interest. Or instead of a $40,000 car costing $40,000 it costs $40,000 plus several thousand more in interest.
The second big issue I have with car payments is it leads people to buy more car they can afford to pay. For many, it’s realistic to buy a car for $10,000 to $15,000 in cash. But for most people, it’s very difficult to buy a $40,000 car with cash.
Here’s the rub: financing makes it easy. Instead of putting up $40,000 cash for the car, a monthly payment of several hundred dollars seems reasonable. Problem is those payments are made for years on end, keeping the consumer in debt and not allowing for wealth accumulation.
That’s one of the reasons loan companies and banks have extended the terms. Instead of a three-year loan at eight or nine hundred dollars, why not get a six or seven-year loan at a smaller amount. Seems good on the surface, but it’s multiple years of extra payments plus potentially thousands more in interest.
Number 6: The Hidden Costs of Opportunity Cost
Here’s something not talked about nearly enough with opportunity cost–there’s more to buying and spending time on things than just the cost. Let’s use the example of a new phone that costs $1,000. On the surface, that looks like an opportunity cost of $1,000. However, if that phone is mostly used for playing games, scrolling social media, and generally wasting time-that cost is much higher.
If 15 hours per week are spent on the phone doing these things, that 15 hours of opportunity cost that could have been spent:
Working out
- Reading a book or blog about investing
- Starting a side hustle
- Watching videos on starting a side hustle
Of course nobody wants to take all the fun out of life and never engage in activities that aren’t “productive”, but it’s important for all of us to put some thought into how we are spending our time. Scrolling through the phone, watching TV, playing video games, etc. all comes with significant opportunity cost.
Number 7: Putting Off Investing
Number seven on the list of rookie money mistakes is putting off investing. I know full well about this mistake because I did it for many years. I went through my entire 20’s without investing anything, which is probably my biggest financial mistake.
There is massive power in compound interest, much more than I ever thought. Here are a few examples assuming a 10 percent average rate of return:
- A 20-year-old who invests $500 per month will have $2,921,111 accumulated by age 60
- An investor beginning just five years later would have over a million dollars less with the same numbers as above
- An investor who begins investing $500 per month beginning at age 35 would only have $649,091 at age 60 (all other factors the same)
There is incredible power in time. The more time in the market, the more opportunity for compounding. Time is one of the greatest allies any investor can have. If I could talk with any young investor, getting started early would be one of the biggest pieces of advice I would give.
Related: The Road to a Million: How Much You Need to Save to Get to One Million Dollars and More
Number 8: Poor Mindset
Mindset is really important. One of the main reasons I had little to no success with my personal finances in my 20’s was my mindset. I made no efforts to improve my mindset, and furthermore, had no idea how important it was.
I wrote about my faulty thinking and mindset in the introduction to my book Cash Uncomplicated, and still write about it today because it’s so important. Some of my faulty mindsets in my 20’s:
- Investing is only for the wealthy
- If only I had more money to get started
- It’s impossible to get ahead because I don’t make enough money
Once I changed my mindset, my personal finances followed suit. None of it happened overnight, but the change has been steady and predictable.
Number 9: Investing Incorrectly
Ask most people what investing means to them and you’re going to get different answers. Many of the answers you’ll get are more speculation than investing. Some examples:
- Buying crypto with the hopes of selling in six months at quadruple the price
- Purchasing a single stock with the hope that it’s going to increase by 300 percent in the next year
- Making a purchase on a single family home with the idea that you’re going to make no improvements on it and sell for $100,000 more in eight months because the market is going up so quickly
Investing is a long game. It’s not a get rich quick scheme or retire in less than a year with the earnings. It’s steady, and sometimes can seem slow. One of my favorite investing quotes comes from Warren Buffett who says: “If you are not willing to own a stock for 10 years, do not even think about owning it for 10 minutes.”
Point being investing is a long game that rewards the patient player with a steady hand.
Another common investing mistake doesn’t come from greed or speculation, but rather from lack of knowledge and procedural awareness. For example, there are stories about people who put money into a brokerage account thinking that was all they needed to do. They failed to allocate the money into a particular investment(s) meaning that the money just sat there.
Some people who have made this mistake don’t realize it for several years until they see their money has not captured market gains because it was never actually put into an investment vehicle. This can be an especially tough lesson during a bull market.
Others pay exorbitant fees to an investment advisor while receiving little to no value in return. Not only do the returns of the investments recommended by the advisors produce less than the market, but the high fees further diminish any gains. A great book explaining this concept is The Little Book of Common Sense Investing written by John Bogle.
Number 10: Listening to the Wrong People
Next on the list of rookie money mistakes is listening to the wrong people. It’s important to be careful about who we listen to for advice. Uncle Jim might sound like he really knows his stuff when it comes to investing, but does he really? Same for the neighbor down the street who talks a big game but doesn’t even invest herself.
Just because someone knows the lingo and can talk about different kinds of investments doesn’t mean they really know what they’re talking about. Some questions to ask yourself when deciding whether to listen to a certain person or not:
- What is this person who is giving me advice investing in themselves?
- How financially successful is this person?
- How many years of experience do they have investing?
- Have they effectively navigated market swings?
Someone who bought a single stock and sold for ten times the price two years later might be skilled, or they could have gotten lucky. What many people won’t tell you about is the ten other stocks they lost money on, pretty much negating the returns of the big win. Before listening to anyone, make sure you’ve vetted them.
Number 11: Stopping Education
When I finished college, I honestly didn’t pick up a book for several years. Then maybe I read one or two a year, if that. I became complacent and stopped learning. Of course I was still learning things at work and improving my skills in that area, but I didn’t do anything outside of that.
My big problem was that I had basically stopped all personal growth for no good reason other than I no longer had a formal curriculum that college provided. This was a really big rookie mistake and I did it for years.
Jim Rohn said: “formal education will make you a living; self-education will make you a fortune.” I had gotten the formal education, but completely neglected the self-education. Along with a poor mindset, stopping education is one of the main reasons I struggled for so many years with my personal finances.
Since making the decision to begin learning again, not only have my personal finances taken off but so has my health and fitness, relationships, and many other important facets of life. If you are active in your self-education–great. If not, think about starting it back up and watch your life dramatically improve.
Conclusion
Rookie money mistakes are part of the process. It’s impossible to get good at anything without making any mistakes. The idea with this post is to be aware of some of the most common rookie money mistakes so you can learn from them while avoiding them.
Kind of a double win. Of course nobody can avoid all mistakes, no matter how much you read and study. But they can be minimized.
