No — it’s not getting a Venti
Photo by Eugene Chystiakov on Unsplash
Asa young graduate, there’s a fair chance of making some financial mistakes right after graduation and getting into your industry. Heck, everyone makes financial mistakes now and then, though some are more significant than others.
You can go from the instant-noodle, student lifestyle to working a graduate job and receiving the kind of money you’ve never had before — disposable income. Then what happens? We’re susceptible to mistakes. But what is the biggest mistake that often occurs?
The answer is generally quite simple, and it applies to anyone, not just those in their twenties. However, it’s more pertinent for the younger, graduate demographic because of the relatively little financial experiences we as an age group typically have.
I’ve seen a lot of graduate buddies on my social media feeds driving around in cars, buying houses, or going on luxury holidays they can’t, in reality, afford. Some people will do this to ‘catch up’ to their new peer group; others perhaps try to impress their old ones.
However, no matter the motivation, the mistake is still the same. It’s called self-aggrandizement.
In other words, lifestyle inflation or living beyond your means. You may roll your eyes or scoff. After all, everyone knows they shouldn’t try to buy what they can’t afford, right? But it happens, a lot, and not just with graduates but anyone who see’s an increase in their income.
It can happen to the best of us though, so what are some things you can do to avoid falling into this trap?
First of all, give it some time.
I’m not saying you should keep eating instant noodles for the sake of frugality. What I am saying though, is when you do get more money coming in, don’t be in a rush to spend it on an expensive lifestyle.
Use the extra money towards paying off any debts sooner, like car loans you might have already got before reading this article. Student loans are also a big deal, and you should look into paying those sooner.
There are loads of resources and strategies out there for helping you towards paying off your student debt, like this repayment calculator. Though of course, one of the best ways to do it is by budgeting properly, for which I recommend YNAB.
When you do upgrade your lifestyle a little.
If you decide you can make a change in your lifestyle, it’s best to go with less than what you can ‘afford’, which is especially true when it comes to potentially buying property.
These days, you can buy a house with a downpayment of just 5%. As appealing as that may sound, it’s nearly always better to save up a bigger deposit and get better (lower) interest rates as a result.
If you combine a more substantial downpayment with a home that is relatively below what you can afford, you’ll be more likely to pay off the house sooner. You would also have some buffer room if something in your finances were to change, like a new family member or career change.
In a similar vein, who needs an expensive car?
I’m not a car person; I don’t get it. The expensive ones are nice to look at for sure, the same way a good painting is lovely to look at, but I don’t understand the desire to own them. I have a little bias on this one, in case you couldn’t tell.
If you must have a car, get the less expensive one. From what I understand, cars also have a lot of maintenance costs. Chances are the less expensive cars also have more common parts that are quickly and easily maintained or replaced.
Cars also seem to depreciate as soon as you buy them, and they all have the same primary purpose. So to me, a fancy car is not a worthwhile investment, where the money could have a better job elsewhere. A fancy car might have automated cupholders, but is it worth the extra stress?
Where I used to work, my manager and I would joke about people who continually bought things they couldn’t afford on credit. We called it “credit life”, as opposed to the “thug life” meme.
Though I will clarify, getting things on credit isn’t inherently evil or stupid. The biggest financial mistake that you can make in your twenties, and further on in your life, is misusing credit.
“We buy things we don’t need with money we don’t have to impress people we don’t like.” — Dave Ramsey
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.