Spending Too Much, Too Soon In Your 20’s

2010 November 16
by Grace Boyle

I experienced this. I had just graduated college, I was in a new place and I felt so sophisticated and mature.

I had a regular paycheck, a salary, a 401k and consistent benefits. I was set I thought. I was 22.

{Photo Credit}

I see it all the time – just because we have all the above, we forget the thrifty, frugal nature of how we were in college or when we were younger. In your 20’s, I think it’s one of the biggest mistakes we make. We tend to overestimate how far our paychecks can take us and blow too much on apartments, trips, fashion and wining and dining. We then assume we aren’t making enough or that we are somehow poor again.

All of a sudden, we assume we’re making nothing. We can’t understand how it’s close to $0 in our bank account at the end of each month. We’re complaining and lamenting.

Just because you’re making more than you have before or you’re just making money consistently period, doesn’t mean you splurge all the time.

Financial experts suggest it’s okay to keep living like a bit of a college student for a few more years. That sounds bad, I’m talking about living a little below your means. In doing so, you can get a better handle on what you’re able to afford, your level of debt, fit into a budget and even savings.

Wait, what about saving?

“No matter how much or how little you make, always save a little bit.”

Start somewhere. Put aside something and set to that each month. For instance, I have an automated amount go into my Savings account each month (from my Checkings) and after a while, you don’t notice that amount being dispersed and I have a chunk of savings, slowly but surely.

Note: If you put $4,000 a year into retirement accounts starting at 22 you could have $1 million by age 62 (assuming 8% average annual returns).

Your Dolla Is Worth How Much?

I love thinking about how our money is worth more now invested than it will ever be. Let’s say you invest $1 when you’re 20, it will be 1.75 times more than $1 invested, when you’re 30, 3.5 times more than $1 invested and so forth.

Living below your means doesn’t sound sexy. But by doing so, you will be able to live well above your means in the future. But really – “20-somethings are more than twice as likely as older folks to have a negative net worth; one out of four families headed by people aged 20 to 29 owed more than they owned.” Let’s step away from deprivation but understand what we can cut out and the balance we can obtain to reach financial stability and/or freedom.

Negative net worth and debt aren’t sexy either. So why not go the other way? Be a little more frugal? Save where you can and still enjoy – because both are definitely possible.

Did you spend a lot on your first salary job? Did you find yourself losing and going into debt? Tell your story.

Update: The blog comments are amazing. The recommendations, ideas and stories are so valuable. Check them out, they should be their own blog post.

In addition, I also wanted to clarify (because of the comments) that I do not condone enjoying and spending. After all, I indulge more than most people I know. I wine and dine on the regular. I buy my friends gifts. I take myself shopping. I take vacations monthly and get on airplanes to take trips 5-8 times a year (last year, went International too). I believe in doing both – I don’t call myself a responsible hedonist for anything.

BUT – I do both because I can. Because I cut back where it doesn’t matter, and splurge where it does. Just wanted to clarify, stingy ain’t no fun. Spend where your values are and don’t go for exorbitant amounts of payments, new car, new home, etc. if you can’t afford it. Plain and simple.

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  • Anonymous

    I’ve been there, though I think it was a bit of a balance between me thinking I had money and my parents wanting what was best for me. I probably wasn’t making enough to start with anyways, but then I was also in the DC area. My parents wanted me to live in a safe apartment builting, doorman and all. So even though they helped me with the rent a little bit, more than 3/4 of my monthly take home was going to rent and bills (especially as rates went up). What I did do however, was also try to put some money aside for my 401K and another Roth. It may frustrate me to see that money somewhere else when I might want it now, but I know it’s going to do me a lot of good when I really want it 40 years from now.

  • Jacqueline Soboti

    maybe my credit card being declined yesterday was the universe’s way of telling me to be a little frugal? 😉 thanks for the polite reminder graceboyle. ps i love your pink pants.

  • Sally Morrissey

    I’m a new reader, and haven’t ever commented, but I absolutely LOVE this post.

    I made all of these silly mistakes when I got my first salary. Like buying a $30,000 car on a $25,000/year income – because I thought I deserved it. What?!

    Flash forward a few years and my husband and I have cut up all of our credit cards and paid off all but a little debt left on his car. It hasn’t been an easy road. But the rewards so far have been awesome. We were lucky enough to take Dave Ramsey’s financial peace class before we were married. Your comment “you will be able to live well above your means in the future” is much like the financial peace philosophy to “Live like no one else so later you can live like no one else.” We get lots of funny looks from friends when we say we can’t go out because we don’t have money in the budget. But it’s a much better feeling that having every trip, every shopping spree follow me home a month later on the credit card bill.

    I really appreciate your post. There aren’t enough of us in our generation with the courage to live frugally and resist the temptation to keep up with our peers. Well said!

  • http://www.neverniche.com Clare Bear

    I. Love. Money. Posts.

    I also track my personal net worth on an obsessive level. This whole personal finance / getting smart with my income has really only begun in the past year but I’m already feeling so much more confident and GOOD about life. It’s important to pay your future self. Keep more posts like this coming!

    <3

  • http://www.smallhandsbigideas.com Grace Boyle

    Clare you have amazing finance posts and your focus is inspiring.

    Did you see I linked to your post in here?? Near the bottom, b/c you’re my finance chica!

    I know it’s a bit out of the norm for me, I have about 2-3 out of my 300 posts but I like this one. I realized that I have a “hold” on my finances, not too savvy, but I feel pretty solid and I don’t share it here. SO, here comes this post. I also hear a lot of friends complain about their salary job not making enough when BEFORE they had the salary job, they had nothing.

    The money rises to meet your needs and often, we forget to match that and also stay frugal. Thanks for the support as always xo

  • http://www.smallhandsbigideas.com Grace Boyle

    Hi Sally, welcome and thank you for your support. I hope you will keep coming back :)

    Thanks for sharing your story – stories are how we learn, connect and grow.

    Good to hear that your husband and you have gotten a hold on your finances. It sounds like your philosophy is working very well. Love it, keep it up! Thanks again :)

  • http://www.smallhandsbigideas.com Grace Boyle

    Jacq! You are frugal. From an outsiders perspective (aka your roommate) you have a hold on your finances, you limit your credit card spending and you know when to cut back and also, indulge here and there.

    Let’s get to the bottom of that weird decline…but yes, I always believe in signs. Hmm…what is it saying?

  • http://www.smallhandsbigideas.com Grace Boyle

    Emily, you have a very good point about saving money now and investing in a 401k because it will benefit your future. In our 20’s, stereotypically, we focus on the moment. We don’t think of the future and we say, “Oh, I’ll do that when I grow up,” or “I’m having fun NOW!”

    That can be a bit dangerous, but to each their own. I find a balance between the two. I am by no means frugal, I enjoy, I travel frequently, I wine and dine but I do it because I can. That feels good. I’m not penny pinching…

    Thanks for sharing your story, too!

  • Doniree

    Mint.com, Mint.com, Mint.com. And having a little set aside in savings. I can’t stress the importance of how Mint keeps me accountable and keeps everything budgeted and right in front of me, and how that little bit of savings saves my life sometimes. The other thing I’d offer to add is that freelancers should NEVER assume they know when their checks are coming because even the most reliable clients switch it up from time to time :)

  • http://www.smallhandsbigideas.com Grace Boyle

    Doni, you are fantastic with your money. I absolutely love that you do not have a credit card (although I have 0 CC debt) it’s admirable.

    Mint.com is great. I have it, but haven’t fully taken a dive into it, but the way it’s structured is so organized and would keep people on task.

    GOOD point for freelancers. I see that with all freelance friends with multiple clients. So do you backfill with saving enough and not “count” on that check (if you can)?

  • http://fiwk.blogspot.com Royce

    High five to Doniree, Mint.com is awesome. BIG TIP TO EVERYONE – even if you don’t use Mint.com, track your spending manually on Excel. It helps a LOT to know exactly what you’re spending, on what categories. I spent $100 (10% of my total month’s spending) on alcohol one month! Wtf was I doing?!

    This is a great post Grace, I believe strongly in saving a bunch and living below my means – with one big exception.

    My gf and I take at least one big trip a year out of the country, and I would never cancel these (typically $2k per trip, including flight) to save further. We stay in relatively cheap hotels/hostels and stuff, but the experience of doing that stuff now when we have tons of energy and health is totally worth the money it costs.

    Other than that, save. Some tips:
    – keep a separate savings account from your bank account, so you can sweep money there and not have it “burning a hole in your pocket”
    – shop for savings rates when you get this account; they all suck right now but ING Direct (www.ingdirect.com) was the best a few years ago, and its online mgmt tools are good
    – use your 401k, especially if your company matches your contributions
    – even better, use a Roth 401k or Roth IRA to save long-term; they won’t be taxed when you eventually take the money out, which will save boatloads
    – consider investing passively in the market if you can save a solid amount of dough – ING has a site called ShareBuilder (www.sharebuilder.com) that lets you automatically invest even a small amount monthly in index funds, which will keep your savings returning (or losing) at whatever level the market performs
    – and one last time, track your spending! It helps!

  • http://twentyorsomething.com Susan Pogorzelski

    It definitely is so easy, especially in your twenties when you suddenly have income and everything seems possible because you have money to spend. Working at a bank, I’m able to keep close track of what I’m making vs what I’m spending and have put a set amount of money into a high interest CD that matures after a year. It’s my back-up money, as I call it — but with no credit cards and a mortgage as my only debt, I haven’t needed it, though it’s nice to know it’s there.

    I think a lot of this is a learning experience that comes with maturity and even age, but most importantly, unfortunately, trial and error. My basic motto after paying down the credit card debt I did have is now “don’t spend what you don’t have…” And if you don’t have it, start saving, even a bit at a time, and make it something to work for.

    Great, great post!

  • http://akhilak.com/blog Akhila

    Great post, Grace. As a recent graduate, I have to say it’s frustrating. I work with a non-profit so my salary isn’t that high. But I still manage to save a decent amount every month which is great. I cook at home, don’t go out or eat out more than once a week, and get my transport costs taken out of my pre-tax income. I don’t have a car and only use the metro. I try not to shop more than once a month, although that $50 leather jacket at H&M is seriously calling my name… I also don’t travel that much, at least not via flight. I take Megabus everywhere which is very affordable.
    Overall I’m a workaholic so maybe, my life isn’t that exciting. 😛 I don’t need a ton of entertainment or to spend money to be happy. The only thing I like spending money on is clothes =) I’m not bad at saving but I haven’t been good at using things like Mint.com to track my costs or at looking into things like my retirement fund. This is my first paid job out of school so it’s hard for me to think about things like retirement. I just have no patience to read through all those papers and details and find out how to invest my money for retirement. It’s just so confusing even though my employer provides that info. I guess I should get on that next…!

  • http://twitter.com/ChelsTalksSmack Chelsea Talks Smack

    I mean, you know my story- you hear my “lament” ….that being said, the reason I have credit card debt, thought it’s not much, was because I used it on some EXPERIENCES (not things) that I wouldn’t take back for anything…paying off the debt is worth it in the end, because the experience that afforded me, when I was 22, running around Europe on my own having an adventure was 100% WORTH IT. Life is too short for me to not have experienced that. I’ve never been great with money, mostly because I’m impulsive….but it also motivates me to MAKE MORE so that I can BE impulsive…which drives me to wrok harder, take jobs on the side, monetize my blog, etc…there’s a balance with all of it- as long as you’re livin’.

  • http://www.neverniche.com Clare Bear

    Gah! I didn’t even notice until you pointed it out. Thank you so much for the link!

    As young people we definitely tend to spend what we make. I’m making twice as much as I did two years ago and until awhile ago wasn’t saving accordingly. We have to adjust to the increases and maintain the savings accordingly – that’s why I’m big on saving percentages of income rather than a set figure.

    I’m constantly biting my tongue with friends our age that say they can’t afford vacations, insurance, etcetera, when they’re the same people that shop and dine out non-stop.

  • http://www.smallhandsbigideas.com Grace Boyle

    Ill give you a blogger hint, you give me a finance hint: http://blogs.icerocket.com/search?q=link%3Aneverniche.com

    Follow that link. It is every trackback to anyone who links to you (Google Alerts suck) plus, I didn’t mention your name here and many others don’t, so you can find anyone who links to you. Great resource, free and you can subscribe to that link – it is my favorite.

    And yes, to biting tongue. I feel the same way. Because I do vacation, all the time. You have such good points:)

  • http://fiwk.blogspot.com/ Scott Borden

    Wow – so many reactions (to the post and the comments) – where to start? I guess I’ll start with my mantra (when it comes to these sorts of things): you only live once, but it’s a pretty long life. What the heck does this mean, you may ask?

    It starts with “you only live once” – akin to Royce and Chelsea, I believe that we should enjoy our time here on Earth with great experiences. This is how I grew up; this is how I want my kids to grow up. There’s not much sense in saving everything for the future, if something unexpected happens, or you simply don’t have the energy/desire to hike through the Amazon (for example). So, enjoy what you can now, because you never know what’s around the corner.

    Wait. Wait. Wait. Scott – what happens when you’re 35 and being denied credit get that loan to move into that house in that great neighborhood with all those wonderful schools for your awesome kids? Well, that’s when the second half of the mantra comes in: “but it’s a pretty long life.” It’s true – while 80/90/100 years doesn’t seem that long in the grand scheme of things, it sure is long in people years. Just think of all the things you’ve accomplished in the last 5 years? So, don’t get carried away with living “once”. I make it a point to max out my Roth IRA and 401K contributions every paycheck, cause I do want to be able to provide those same great experiences for my kids (and their kids…).

    Great post Grace! This is definitely something that should be read by all young 20-somethings – hopefully by doing so, living frugally will no longer be “un-sexy”.

  • http://fiwk.blogspot.com/ Scott Borden

    PS I also experienced this issue (spending beyond my means), but this happened in my final year of college. I went through a 4-5 month period where I couldn’t fully pay off my credit card. Prior to this, I never understood how the credit card companies made money – well then, I know now! Those 15-20% interest rates are IN-SANE! I was able to end up net positive by graduation, and have made it a point to pay it off every month since – that’s the first thing I ensure gets done.

  • http://www.neverniche.com Clare Bear

    You are a gem, thank you! Finance hint in return: Fidelity Investments has a no-fee Roth IRA. They waive the $2,500 minimum first deposit if you commit to at least $200 per month.

    😀

  • http://www.smallhandsbigideas.com Grace Boyle

    Hey Scott!

    Thanks for the insightful comment. I wholeheartedly agree with you – LIVE, DO, EXPLORE and take risks. If you knew me in person 😉 you would know that is exactly how I live my life. I’m taking vacations every month (sometimes more) I buy gifts for my friends, I wine and dine each week, etc. so I enjoy. I’m Italian!

    But I got ahold of my finances. I didn’t buy a new car, my car is paid off. I have reasonable rent that MATCHES my income. I buy $30 bottle of wine at dinner, not $80. I mean these are just examples but it is all about being reasonable in the moment, but also enjoying.

    I have a lot of friends that do everything without considering debt or what they paycheck equals, hence the reasoning for this post and that we get excited to spend it all on our first salary job, when taking steps also helps us.

    Thanks for sharing and your own story!

  • http://www.smallhandsbigideas.com Grace Boyle

    Your insightful comment drove me to add an update to the end of my post (did you see it) to encourage readers to read the comments, they should be their own post. I love what you’ve added.

    I also clarified how much vacation I take (5-8 a year) always once a month trips away, wining and dining, buying gifts, etc. because it’s true, we must enjoy and be in the moment. Our 20’s are inherently different than when we have families.

    I love your points! Again, thank you :)

  • http://www.scribnia.com/author/show/473/david-spinks/ David Spinks

    I’ve definitely been spending too much money…

    I’m young, making a good salary, and just moved to NYC. It’s pretty much impossible to avoid.

    What I did do though, was lived at home for a year after college and saved up a very healthy amount. Now I have some money I can put away, some I can invest into my projects, and some to live it up in NYC.

    Have to find that balance between using the money you make to enjoy life, and ensuring that you have enough money in the future to enjoy life comfortably.

    I started using mint.com a little bit. Not sure I’ll keep up with it but I’m giving it a shot.

    Great post Grace. Really valuable stuff for all 20-somethings.

  • http://www.smallhandsbigideas.com Grace Boyle

    Susan, my friends who work at banks are the best at understanding their finances :) Everything is in check and they’re smart.

    It’s good to make mistakes, but what’s also good is to learn from them.

    Great points, thanks for sharing!

  • http://www.smallhandsbigideas.com Grace Boyle

    Susan, my friends who work at banks are the best at understanding their finances :) Everything is in check and they’re smart.

    It’s good to make mistakes, but what’s also good is to learn from them.

    Great points, thanks for sharing!

  • http://www.smallhandsbigideas.com Grace Boyle

    David, you’re in a good spot! And it feels good.

    Having that year of savings and low cost really goes far!

    A lot of people have been loving mint.com – I have it, but don’t utilize it to the fullest. I probably should. I don’t feel I “need” it, but I also know that it is so great at compartmentalizing everything and organizing your finances.

    Thanks for the comment, kind words and tweet!

  • http://www.smallhandsbigideas.com Grace Boyle

    Gotta live and love it. You brought up a good point that I didn’t address enough – you know me, I’m out about, traveling, wining, dining, etc. I indulge. I can’t not.

    It’s finding that balance where I’m able to live comfortably, indulge and enjoy but I save on what doesn’t matter to me and indulge on the things that do.

    One of my life list items is passive income. YES to that!!!

  • http://www.smallhandsbigideas.com Grace Boyle

    Akhila, but with time it likely will become less frustrating…? Right? :)

    I think it’s important to still be able to shop, not every week, but still shop. You like fashion and style and it’s something you think about. I think that’s okay.

    It sounds like you’re saving in ALL areas. To be honest, more than most people (public transport, cooking at home, only once a week out, etc.) you should give yourself kudos.

    I still don’t really get my 401 k. Our financial adviser who runs our companies 401k offers to meet with everyone to talk about it, so that might be an option? I also love reading posts about it. But really, I’m not worried too much. I’m saving, I’m enjoying and I also know that my 20’s will be so different financially then as I grow and eventually have a family.

  • http://www.ashalah.com Ashalah

    I am probably the worst saver in the entire world. Since I was spending 70% of my paycheck each month on rent and a large sum on top of that on food, I decided it was pointless to save anything so I spent it all. The only time I ever really saved was right before I went to Europe and proceeded to spend it all. Not having any money for the past year and then suddenly having a paycheck has put me into spend overdrive. I’m slowing down but it’s easy to treat myself when I have money in the bank. Granted, when you treat yourself as often as I do, it stops being a treat.

    I am making more of an effort to start saving something–anything–so that I can have a bit of savings to fall back on should I ever need it.

    Thank you for this post, Grace! I needed that extra reminder (more like kick in the pants) to get my savings in gear.

  • http://www.smallhandsbigideas.com Grace Boyle

    Sometimes it is too hard to save…I know how that is. It’s not always possible. But hopefully, we could work toward it even if it means saving $20 a month somewhere in a piggy bank 😉

    Glad it was a kick in the pants. Money sucks, but unfortunately, it’s around and makes many things happen (or not) so somehow we gotta learn to embrace and OWN it ! ha

  • Mehnaz

    I was brought up in a very money-conscious environment (maybe a little too cautious at times). I still live well below my means, and again, this doesn’t mean I don’t have any fun. I give myself a cash allowance every month for little expenses such as a coffee, or a quick lunch out and for sundry things (you never know when you’ll run out of something at work).

    I also highly recommend doing the simple things. Don’t eat out every single weekend or for every meal. Eating out is expensive – why not have some people over and cook? If you can take transit instead of driving to work or to other events, it’s a viable, and cheaper option.

    It’s amazing how saving $4 or $5 bucks here and there can really impact your bank account.

    Also, at the end of the month, if you’ve got any cash left over, put it somewhere – a bank account, a jar, anything. At the end of the year, you’ll be surprised how much you have!

  • http://www.smallhandsbigideas.com Grace Boyle

    All very good points! I like the notion that $4-5 here and there can save a lot. Think about people with that Starbucks coffee everyday, that’s thousands of dollars at the end of the year. Craziness.

    Thanks again for sharing :) Love hearing your story.

  • http://www.FabulouslyBroke.com FB @ FabulouslyBroke.com

    Hear hear!

    Did you spend a lot on your first salary job? Did you find yourself losing and going into debt? Tell your story.

    My first salary job I signed up for a 100% company matched retirement plan, to put in the max.

    Then I had to slowly learn and struggle with “Frugality” which let me pay of $60k in 18 months.

    Granted, I became a minimalist during that time as well since I was on the road so much, that I sold 50% of my wardrobe, lived out of a suitcase in hotels the client paid for.

    That’s pretty much it. After that struggle, I realized that I preferred having money than having things, and what I considered necessary luxuries were only luxuries, not necessities.

  • Jenn Pedde

    I love the sentiment of this post… and I actually do agree with every point made, but sometimes its tough. I go without things like cable to make sure I have an extra $100 every month, but when your student loans take up 30% of your take home each month, your living expenses (rent, car, ins. etc) at 40%, and then the leftovers like groceries and gas at about 20%, it’s hard to do anything else with that 10%. I splurge on coffee maybe once a week, and I give myself one big trip every year. That’s not living decadently, and saving is extremely tough.

  • http://www.smallhandsbigideas.com Grace Boyle

    I didn’t go into debt with my first salary job (I’m still at that job, but the first year was so different) but I did spend wherever, whenever. I’m pretty cognizant, so I realized what was happening and stopped using my Credit Card just because it was easy and fun and not immediate. Now, I have zero credit card debt and know where/when I can splurge and when I cannot.

    I am far from perfect with my finances. I could probably do more with my 401k and although I have a budget, I don’t always stick to it.

    Your last line really nails it: That’s pretty much it. After that struggle, I realized that I preferred having money than having things, and what I considered necessary luxuries were only luxuries, not necessities.

    Thanks for sharing!

  • http://www.smallhandsbigideas.com Grace Boyle

    Jenny you bring up a good point. There are times where you must be frugal where you have to re-evaluate your spending to your income.

    With 10% left over, that isn’t much. Like are there ways to re-work how much you spend on groceries, food can always be molded like making soup for one week which costs you about $15 for seven days…or how much is your car? Can you sell it for a cheaper one? Trade it in? Etc..

    There are so many options to maybe give you more than 10% at the end of the day and unfortunately, our 20’s aren’t always for living decadently. I don’t. I could always have more and do more, but it’s about finding a balance, cutting back, or maybe re-evaluating the current job you have?

    Thanks for sharing. I know money isn’t always easy and it’s usually a pain point that can last much of our lives…

  • http://pulse.yahoo.com/_3R5QD62ABYUVRFPNPZGKTKHUQA Pratik
  • http://pulse.yahoo.com/_3R5QD62ABYUVRFPNPZGKTKHUQA Pratik
  • http://fiwk.blogspot.com Royce

    Good point about doing things now before we have families… and families of course also change the “savings vs. spending” outlook significantly.

    Interesting anecdote back on your point about “How much is your dolla worth?”… in the Warren Buffett biography “Snowball”, there is a discussion about how Buffett, even at a young age, viewed the compounding effect of interest as an inherent characteristic of money. So in other words, the question isn’t “should I spend this $10 or should I save it for a 10% return on interest?”, but rather “is what I’m spending this $10 on really worth $26, which is what my $10 will be worth in 10 years if I save it with interest?”

    Viewing your savings through the prism of what it will actually be worth in the future changes the values of the equation. Which hopefully encourages more savings.