Nobody is perfect and we all make mistakes. In fact, there are 6 mistakes that a lot of us have in common. Maybe you have already made these mistakes and learned from them, or maybe you are continuing to make these mistakes without realizing what you are doing. If you have had a bad day or week, and are not feeling very open-minded, then please do us both a favor and come back another day. The items below may strike an emotional chord with you, so be prepared.

When I first came to the realization of some of these financial mistakes, I did not truly want to believe them to be an issue. I told myself that everyone does these things, so they couldn’t really be that bad. Little did I know at the time, that these “norms” are extremely detrimental to your financial independence and early retirement. If you want to know how to get rich young, then a great first step is to learn about the mistakes below and avoid making them. However, if you have already made any or all of these mistakes, then fear not, you can still learn from them!

1. Buying A New Car

According to this U.S. News Article, the average price of a new car in the United States was about $31,252 in 2014. In the same year, the average net worth in the United States was about $301,000 according to this Financial Samurai article (Note that the median was only about $45,000). Even if we use the averages, that means that the average person in the United States would spend about 10% of their entire net worth on a car, that loses value every single day. Not only is the car depreciating over time, but it costs money to maintain, to gas, and to finance!

Let’s assume that you do actually need a car because you live somewhere well removed, and we will only look at the depreciation and the financing aspect. Assuming you paid 20% or $6,250.40 on your $31,252.00 car and took out a 5 year 5% auto loan on the remaining balance, you will pay $472.81 per month for your car payment. Added up over 5 years, this comes out to $28,308.67 plus the original $6,250.40. That puts you at a financing total of $34,559.06. Congratulations, you just paid an extra $3,307.06 for buying a new car on credit.

Now let’s take a look at the depreciation aspect. According to Edmunds.com, new cars are worth 37% of what you paid for it at the dealership after 5 years on average. That means that your $31,252.00 car is only worth $11,563.24 by the time you paid off your loans. So to sum it all up, you would have finished paying $34,559.06 for your car that is now worth $11,563.24. That is a loss of $22,995.82 in 5 years! What is worse, is that people do this over and over again. How would you feel if a

The Solution

If you are going to buy a car, do yourself a favor and look into flipping this scenario around. Buy a car that is 5 years old to avoid the huge initial loss in value and buy it in cash. You could be saving yourself thousands of dollars. Also consider going down to one car or no cars if you are currently a multi-car household.

2. Financing Too Much House

Along the same lines of the new car, many people find themselves buying more house than they need or can afford. According to Zillow.com, the median home value in the United States is about $184,000 as of this writing. In today’s ultra-low interest, the average 30 year mortgage rate is about 3.68% according to Freddie Mac’s survey. With a 20% down-payment ($36,800) and 3.5% ($6,440) in closing fees, this leaves a mortgage of about $153,640. This comes out to an interest and principal payment of about $705.44 per month. Assuming you stay in the house for the full 30 years to pay off the mortgage, you will have paid a total of $290,759.09 including your initial down-payment! That is $106,759.09 over the original purchase price!

To make the story worse, most people do not ever end up owning their homes. The average owner of a single-family home moves after about 13 years before moving again according to this Eye On Housing Article. Unfortunately, people then tend to upgrade and end up continuing and magnifying the cycle. If housing prices do continue to rise, these people may end up having a nice net worth on paper one day. However, they will never realize these gains unless they are willing to downsize at some point.

The Solution

Buy only as much house as you can afford. Bigger houses come not only with bigger mortgages, but bigger maintenance bills, and bigger costs of furnishing. If you are planning on buying a house, make sure that you are actually going to be in the area for quite some time. Buying a house this year, then moving next year is extremely risky and expensive. Finally, make sure you have a down payment of at least 20%. If you put down any less than this, you have to pay PMI (Private Mortgage Insurance) which is the equivalent of taking your money and lighting it on fire.

Also, check out this free calculator from the New York Times to see if you are better off renting for now!

3. Purchasing On Credit

According to TransUnion, the average credit card debt per borrower is about $5,337. The average rate on a credit card is about 15.07% per CreditCards.com. If you have a minimum payment of 4% of the balance and continue to pay only the minimum, it will take you about 10 years and 5 months to pay off the credit card and you will pay approximately $7,686 to do it! To make matters worse, this is only how much somebody who pays off their credit card with the minimum would eventually spend. Imagine how much interest you are paying if you continually carry a balance at this level!

The Solution

Avoid credit card debt as much as possible. Credit cards are a great tool to use, however, you must be vigilant. Pay off your balance every single month to avoid those dreaded interest payments. As Will Smith famously put it, “Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like.” Are you starting to notice a theme here? Credit and loans are extremely dangerous to your financial future! If you do currently have a large amount of loans, learn to get out of debt today!

4. Indulging On Too Much Entertainment

Frankly most people simple spend too much on entertainment. The excuses are usually along the lines of “I need some time to decompress”, “I need some me time”, “After a long week, all I want is to relax”. All of these are seemingly logical. After all, your mental health is extremely important. However, would you rather spend your money on decompressing from work and then not having enough in savings that you are forced to stay at that job for years longer, or would you rather spend your money on funding your exit from the rat race.

One of my friends, Lily, is an excellent example of this. Lily was spending about $50 at the bars every weekend to unwind after a long week. If Lily would have continued down this road, it would have cost her about $60,998.55 over the next 30 years with 7% compounding because she could have been investing the money instead. Another friend of mine, Joe, was spending about $100 on golf each weekend. Over 30 years this would have come out to $121, 997.10 at the same 7% rate. Those are some huge chunks out of your future nest egg!

Those continuing costs on entertainment are a huge danger to your financial freedom, and need to be held to a higher scrutiny. Remember, a single daily cup of coffee could be costing you 194 days every 10 years! Now add up all of your other recurring expenses and imagine how high those numbers truly are.

The Solution

A first step to start taking is simply start exchanging high cost entertainment for low cost entertainment. You can cut costs while still having a good time. Even better, start using your free time to learn something new. Start creating value for people on your free time in a way that you enjoy and you can potentially start a whole new career that is more meaningful to you.

5. Not Saving Or Investing Enough

It is commonly quoted in the media lately that we have a retirement crisis in the United States. Blame is commonly thrown around and fingers are pointed, but there is a common theme if you actually talk to people in the wiser generations. That common thread is that many people simply did not start investing early enough and they underestimated expenses. Retirement often can feel like it is so far in the future, that we don’t need to start thinking about it until we are getting closer. The sad truth is that people simply have no idea how much money they are going to need, then start saving after their prime earning years are already over. Unfortunately, you may lose your job at one point or another, you may need to take a pay cut, or you may have a health or family issue that forces you to take time off. These are all real possibilities that you need to start saving for, and why simply saving 10% of your income just doesn’t work.

The other issue is that people are notoriously bad about saving up for “unexpected” costs. When talking to friends about how much driving costs them, they frequently only count the cost of gas. They forget about insurance and they forget about depreciation. The fact is, your car is going to need repairs, and it is going to need to be replaced. Instead of worrying about a large expense when it happens, start saving for it now. The IRS allows business owners to deduct 57.5 cents per mile for the cost of operating a vehicle. You should be doing something similar. In our own house, we use this IRS rate to guide our saving for vehicles. We went down to one vehicle, but my wife currently drives about 600 miles per month. This comes out to $345. She spends about $34.29 in gas at today’s rates of around $2/gallon. We subtract that from the $345 to get $310.71 that we put into our emergency fund just for vehicle related expenses every month. Make sure that you are not missing those “hidden” expenses that suddenly pop up in a few years in large numbers.

The Solution

As we have discussed before, compounding interest is an awesome tool, but you must start investing young in order to take advantage of it. If you haven’t already, open a retirement account and start investing! Make sure that you have an emergency fund or are building one up now. Things like car troubles and medical accidents are likely to happen from time to time, and it is important to be prepared.

Conclusion

1. Buy a 5 year used car with cash to avoid the large portion of depreciation and financing costs
2. Run the numbers before buying a house and plan on staying in the area for a while before moving
3. Pay off your balance on your credit card every month to avoid interest
4. Trade your high cost entertainment for low cost, no cost, or even options that will pay you
5. Fund your emergency savings and increase your retirement contributions

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“An investment in knowledge pays the best interest.” -Benjamin Franklin