In my 20’s, I was not good with money. By 29 years of age, I was $10K in credit card debt. I got by, but I made a big mistake that I realized too late. The funny thing is that I thought I was doing it right the entire time. Well, maybe not entirely right, but certainly good enough that it wouldn’t have an impact on my future. The sad part is I was wrong. I think a lot of good came from it in the end, but here is my biggest financial mistake that changed my future forever.
My Biggest Financial Mistake That Changed My Future Forever
The mistake I made in my 20’s is that I treated my credit limit as my money.
In short, I didn’t just spend the money in my checking account, I spent that money plus some of my credit limit.
Basically, if I could make the payment on my credit cards, then everything was OK. That is how I justified it. After all, the bank told me I could spend up to this limit, so it must have been mine to use as I pleased.
Instead of realizing that this was money that was not mine, and that I was borrowing it and paying interest, I just figured it was OK to use it when I wanted something.
A responsible person, by definition, is someone who pays back a loan per the terms agreed upon by both parties. So, while I was responsible and made my payments and never fell into delinquency, I didn’t realize how skewed the deal was against me though and it cost me dearly.
I just thought it was normal to have credit cards and I couldn’t fathom paying them off each month though. I mean, what was the point otherwise? This was before rewards, which only fuels bad behavior, but why use credit cards if you had the money in your checking account? Only seemed natural to carry a balance.
The Accumulation Of Debt
By 29 years of age, I had $10K in credit card debt. I didn’t just wake up one day and all the sudden had a bunch of credit card debt though. It was the result of hundreds of decisions that I made in my 20’s using the mindset I previously described.
Instead of saying no the moment I didn’t have more money, I rationalized the decision and used my trusty credit card.
Between 18 & 25 I paid my card off every year or so. I would build it up a few hundred dollars and then pay if off during the summer when I was working.
The problem is that I didn’t change my mindset with it. I simply paid it off and got going with business as usual. I would think, “great, now my balance is zero, so a few dollars won’t be much at all.”
Rinse and repeat. I never learned my lesson.
At a certain point though, my lifestyle inflated, and I could no longer pay off my credit card each summer. What was $2,000 became $3,000 and then $5,000 and on and on. Like a frog boiling in water, the temperature slowly rises, and you don’t realize what is happening until the water is too hot.
So, that is how I got to 29 years of age with no progress in saving money and $10K of debt.
The truth is that I didn’t see the future to know why I needed to save or not be in debt. I knew that eventually I would need to save for my retirement, but why would it matter when I started saving or if I had debt in my 20’s?
My Missed Opportunity
By using a little credit every month, I gradually dug a big hole and wasted my 20’s.
The flip side is if I spent a little less than I earned each month that excess money could have been put into an emergency fund and then I could start saving for retirement.
So, instead of putting $30 a month on a credit card, if I had put $30 a month in a savings fund it would mean a swing of $60 a month or $720 a year. Over 10 years that is $7,200 and when you add interest paid and made to that, we are talking about a swing of thousands of dollars that I could have had. Instead, I was more likely to borrow $30 instead of saving $30.
I was constantly paying interest rather than making it and that cost me dearly.
You can’t have your 20’s back. Your 20’s are the best time of your life to invest.
That is because the money you invest in your 20’s has more time to sit in the market. If you invest at 22, then by 65, it will have been making interest for 43 years. Whereas the money you invested at 55 will have only been sitting in the market for 10 years.
So, I might make more money in my 30’s than did in my 20’s, but any money that I invest now must work harder than if I had invested it sooner. Time in the market is critical.
How This Affected My Future
Obviously, we had to pay off this debt, but that is another story. We ended up paying off $107K in 33 months and that also changed our lives and the fruits of that continue to reveal themselves to this day.
The real bummer of all of this is how much money it cost me/us in the long run. If you look at this chart below, you will see the benefit of having invested starting at age 22.
Using a rate of return of 10% in each case, if I/we had invested $2,000 from every year starting at age 22 ($166 a month) we would have $1.4mm by age 65 having only invested $88K. Keep in mind, we paid off $107K in principal in 33 months so this is nothing.
Chart 1 – Most Minimal Investment
Age Started: 22
Amount Invested Per Year: $2,000
Total Invested: $88,000
Total by Age 65: $1,435,809.67
Chart 2 – Starting 10 years later with same investment amount
Age Started: 32 (when we became debt free)
Amount Invested Per Year: $2,588.84
Total Invested: $88,000
Total by Age 65: $698,667.67
Chart 3 – Starting 10 years later trying to match resulting net worth of Chart 1
Age Started: 32 (when we became debt free)
Amount Invested Per Year: $5,300
Total Invested: $180,200
Total by Age 65: $1,431,129.15
If I started at age 32, when I became debt free, I would have to invest at least twice as much per year in order to have the same amount of money by age 65.
I not only spent tons of money in interest paying down my cards over time, I now have to invest double what I would have otherwise to be in the same spot financially at age 65.
So, the moral of the story might also be to invest young, but my mindset wasn’t wired for that. I was all about maximizing what I had and that included my credit. By always spending more than I had I lost any chance to invest in my 20’s and I paid dearly.
So, through the process of becoming debt free and getting intense about our money we have hit a hyper drive for saving and investing. Not sure if that would have happened otherwise to be honest. We are still enjoying life, so we aren’t hitting scorched earth levels of spending, but these charts drive the point home.
The time to invest is now. We are debt free and in our 30’s and we can’t afford to waste them. At this point, we know better and we choose to use past mistakes as motivation.
Also, I discovered a passion for personal finance and I want to help others pay off debt too. I don’t recommend anyone actually starting a blog, but that is one thing I chose to do as a way to continually talk through this topic and reach others. It has been a great experience though and I am very thankful for all the relationships I have gained during this process.
What I Want You To Take From This
This is simple.
Pay off debt first, but invest as soon as possible.
Invest in yourself by paying off your debt (have a $1,000 emergency fund first), then save that 3-6 month emergency fund and then invest everything.
Paying off debt is investing so don’t be misled by my charts above. When you have no debt, you can invest more, and your life is simpler. That in turn allows you to be freer with your investments and take risks you wouldn’t otherwise. Debt freedom gives you that option. Being in debt while investing gives you very little flexibility.
If you are still unsure about whether you invest or pay off debt, follow this guide.
If you are in your 20’s, be hardcore and be intentional now. It will open up a ton of possibilities for you.
If you are not in your 20’s, then start now regardless. It will be tougher but most likely you make more money now than when you were in your 20’s. Use your wisdom and experience to your advantage.
I want you to invest as much as possible regardless of your age. Don’t just invest $5,000 a year. Instead, invest $20,000 a year and watch your 40’s, 50’s, 60’s, etc. end up much easier on you.
Also, realize that the money in your bank is the money you have. Stay away from credit cards if you aren’t paying them off every month. The charts above show you how devastating they can be considering how much money I wasted paying interest in my 20’s. I can’t even quantify it.
So, regardless of where you are, take your mistakes, put them behind you and proceed with confidence knowing that you can turn things around and find success.
Start with this first step to get out of debt and use motivation to fuel your progress.
It’s so easy these days to fall into the trap of convincing yourself that you can afford something based on whether you can make the monthly payment. And these credit card companies make the limits so high! I’m in the same boat and am starting later than I would have liked (darn my early 20s self!). But, as you alluded to earlier, the debt I accumulated woke something inside of me that has turned me into a frugal, savings maniac that I’m not sure I would’ve been had I not had the rude awakening. Anyways, great post! Thanks so much for sharing!
Yup, sounds very similar to me in a lot of ways! It is what it is but it is scary that for as behind as we might feel, so many are further behind. Thanks so much for the comment!
Great post Kevin, your charts represent a great example of compounding money. Its hard to wrap your brain around missed opportunities when your in debt, and cannot deploy money to work for you when you’re young. Wish they taught this in school. Thank goodness for Blogs like yours.