8: Financial Mistakes to Avoid in Your 20s & 30s

0:00If you used Babbel, you would. Babbel's conversation-based techniques teaches you useful words and phrases to get you speaking quickly about the things you actually talk about in the real world. With lessons handcrafted by over 200 language experts and voiced by real native speakers, Babbel is like having a private tutor in your pocket. Start speaking with Babbel today. Get up to 55 % off your Babbel subscription right now at babbel.com slash Spotify. Spelled B-A-B-B-E-L dot com slash Spotify. Rules and restrictions may apply. Hey everyone, and welcome back to the Rich Habits Podcast. My name is Austin Hankwitz, and as always, I'm joined by my co-host, Robert Croak.

0:38Robert is a seasoned entrepreneur in his 50s with more than$200 million in company exits under his belt, and I'm an entrepreneur in my late 20s with a background in finance and economics. Since quitting my full-time job in corporate finance a few years ago, I've built a seven-figure media business and advised some of the most well-known fintech companies around the world. As the show name might suggest, every episode we talk about rich habits as they relate to business, finance, and mindset. However, we try and bring you two unique perspectives. One from an industry veteran, Robert, and the other myself, someone who's still in the process of building wealth and figuring it all out.

1:16Robert, why don't we jump into things? What are we going to be talking about in today's episode? Let's do it. In this episode, we're going to be talking about some of the biggest financial mistakes people make in their 20s and 30s that might delay their wealth building process, specifically buying versus leasing a car, credit card debt and consumer debt, and the good old being house broke with the overly priced expensive house payment. I'm excited for this episode because you mentioned something that is really important and it's the wealth building process, right? At the end of the day, money comes from a finite budget for a lot of people.

1:50And if a large portion of that finite budget is being paid toward credit card debt or leasing a car or some sort of expensive housing payment, that's money that's not going to go toward retirement investing. So this episode is really important for people who are in their 20s and 30s trying to figure out how do I come up with money to invest toward retirement? Where does this money come from? How can I pull from other line items in my budget? I'm really excited about this one, Robert. So kick us off. Walk us through your sort of perspective here on the buying versus leasing a car? Yeah. So a car is the biggest depreciating asset you're ever going to purchase other than maybe a boat.

2:27And so what a lot of people get wrong, and there's certain financial gurus out there that I won't agree with, we won't mention any names, but what a lot of people get wrong is they feel because they were told by their grandma or their grandpa or maybe their parents, you should always buy a car. And that's just not actually sound financial advice. If an asset is a depreciating asset like a car, then you don't want to buy it. Now, how I break that down for you is this. If you're going in to get a new car, you would want a lease because you can walk in with zero down payment, zero out of pocket, and get to the payment you want to get depending on the term you do for the lease.

3:09But if you're going to keep a car for 10 years, then it might be better to buy as long as you're looking at buying a car that maybe is two, three years old to start. Because what you don't wanna do is go on into the dealership, buy a brand new car, put 15 or 20 % down to get to the payment you wanna get at and then have this car immediately depreciate 25%. So there's a lot of things we could do. We could talk about this topic for hours, but the general rule of thumb is lease if it's new, buy if it's used, but still when you're buying, if you're going to buy used, I strongly recommend not buying anything within two to three years old.

3:50You want to get to that three or four year mark because of the fact that a major portion of the depreciation will have already happened. Lease if it's new and buy if it's used. And if you are buying, try and buy something that's three, four, five years old because the car has already depreciated in the beginning. That makes a lot of sense. Now, what I'm thinking is if I'm in my 20s or 30s to kind of push back on this idea of leasing a new car at all. I mean, if you're in your 20s and 30s as someone who's 26 and trying to build wealth, you should not be leasing a new car. I know a guy who just bought a brand new BMW.

4:26He's probably leasing it. I didn't ask him how he got it. The guy's 27 and he sells for, you know, he's a sales rep for one of these alcohol liquor companies and i'm just like i know he's not making enough to afford a 1200 lease payment per month on a bmw right that just doesn't make sense and you can find a lot of good 2016 2017 2018 cars out there right now that as we've seen you know we saw the car the used car bubble come up recently i call it 2020 and 2021 it's beginning to come down in 2022 i'd imagine it's going to continue to come down in 2023. So if you are in your 20s and 30s, I just believe that you should not, unless you're a millionaire, which congrats to you if you are, but I just don't believe you should be owning a brand new car.

5:12That's my perspective. Yeah. And you touched on a very important thing, and that is the bubble that happened in the used car market. During COVID, used cars were impossible to find, so the price remained really high on those cars. But that is now over and the prices are coming back down to where they normally would be. At the end of the day, if you're buying a car new or a boat new, you just really want to protect your capital as much as possible because of the fact that they depreciate so much. If you're in an industry where you need to look the part, say you're a lawyer or you're a real estate agent and you can't show up to a job site or a house or a client and you feel the need to have the newer car, then you'd want to lease.

5:53Hopefully, if you're leasing a nicer car, you're able to close more deals and make more money. So maybe you can justify it that way. I can see both perspectives. I really can. And again, as someone who's in their 20s trying to build wealth, I would much rather take an extra$400,$500,$600 a month that would go to a high lease payment and invest it in index funds. Yeah, 100%. And that's why we're here is to teach people that because most people still have that consumer mindset where they start making more money. and then they immediately want to figure out how to spend it. We think differently. We think, okay, I'm making more money.

6:29This gives me more money to put aside to invest and diversify our portfolio. So I think it's just the difference of two mindsets. And that's one of the things and reasons why you and I are here with this podcast and our content is to teach people that you have to make sure you're putting away that 15, 20, 25 % every month for your investment portfolio. And you can't do that if you constantly have lifestyle creep. So talk to me now, Robert, about spending. You said spending money, lifestyle creep. That turns into credit card debt, right? If you're not careful, walk me through how people make a mistake with credit card debt and what you think the solution should be here.

7:08Well, the average credit card percentage right now is 24%. It's not just credit card debt, it's consumer debt. So let's talk taxes, hospital bills, anything with penalties and interest that's high interest is problematic. So the key here is to get that paid off as soon as possible because you can't out invest high interest debt. And so for me, that's one of the biggest struggles that I see people deal with is having this large sum of credit card debt, but then they're asking me where they should be investing. And they're not understanding the arbitrage of their money and the difference. And what I mean by that is when you have a 20%, 24 % interest on a credit card, but you think you should be investing in index funds that might make you 8, 10, 12%, that is absolutely incorrect.

7:56You want to pay that credit card debt off as soon as possible and really get rid of that high interest debt. You could do that with getting a zero interest credit card that you would then pay off the debt and make sure you stay ahead of the timeline on the zero interest. If you own a home, you could do a HELOC to pay that off right now. You can get a HELOC loan against your equity in your home. That might be 6 % or 7%. And then you're still 14%, 18 % to the good because you're borrowing money that's cheaper to pay off the high interest debt. What exactly is a 0 %? I've heard of these, right? The balance transfer cards.

8:33What exactly is that, Robert? So basically, you would go and you would get a zero interest credit card, do a balance transfer to that credit card. So let's say you're paying 22%, you get the zero interest in say it's 14 months, 12 months, eight months. You transfer that balance and then that gives you the time to get ahead of getting that paid down so you're not continually paying that 22 % interest. And I think just finding that strategy, and you mentioned earlier people's earnings being finite. And this is where it's important to look at side hustles, second jobs and losing those time sucks you have in your life.

9:10Because if you had, let's say you have$15 ,000 in credit card debt, some people it's much higher, but let's use 15 ,000. If you were to go out and immediately, let's say you can't do the HELOC, maybe your credit's dinged so you can't get the zero interest credit card. What you could do then is go out and get a side hustle immediately. Maybe it pays three,$400 a week and take all of that money and dump it into paying those credit cards off as soon as possible. Because once you get cash flow positive and those credit card debts are gone, then that same side hustle money rolls into your investment portfolio, that$300,$400 a week, to really accelerate your wealth journey.

9:51So that's some of the strategies that I would do if I were in that situation. Yeah, the balance transfer makes a lot of sense, right? I mean, if someone is literally up to their eyeballs and call it$15 ,000,$20 ,000 in credit card debt and they're paying this minimum payment that has this 24 % interest baked into it and they're really trying to attack it, but it's not really working for them. Opening up a 0 % interest credit card that has a 12 or 14 month, 18 month on that credit card and then rolling over that balance where you can now say, okay, I've got 12 months or 18 months, whatever it is to pay off this card.

10:27That just makes a lot of sense. I like it a lot. Yeah. We just have to look at the fact that you can't out invest credit card debt and consumer debt. So the key here is to minimize it or get rid of it as fast as possible. That's the key takeaway. Really, before we jump off to our next topic here, talking about and explaining how to get rid of credit card debt as fast as possible, right? There's two methods to go about this. It's called the debt snowball or the avalanche method. They're both very similar in the sense that you end up at the end of this with no credit card debt, but how you go about it is a little bit different.

11:00So with the debt snowball, what you're essentially doing is you're saying, let's say you have four different credit cards. One has a balance of$2 ,000, the other has a balance of$6 ,000, the other has a balance of maybe$8 ,000, and finally the last one's a balance of$10 ,000 on it. So you've got nearly$20 ,000,$25 ,000 in credit card debt here. What the debt snowball does is you list your debts, smallest to largest. So you'd say, okay,$2 ,000,$6 ,000,$8 ,000, and$10 ,000. So what you'd be doing is taking all this side hustle money and any extra money you can scrape together and tackle that smallest debt, that$2 ,000 with a vengeance, right?

11:33You hear Dave Ramsey say that sometimes. So you would pay off this$2 ,000 and now the minimum payment that that$2 ,000 credit card had, call it$80 a month,$100 a month, then roll that minimum payment into the next debt, right? And now finally, once you get to this$10 ,000, this last big chunk of money here, now have the minimum payments of the previous three cards also paying toward that balance, which is gonna speed up the process tremendously, right? So when you think about a snowball rolling down a hill here, you know how it collects more and more snow? That's this snowball collecting more and more weight against these balances for you to pay them off quicker.

12:09And then finally here, the avalanche method. It's very similar, but instead of listing your debts from smallest to largest, you list your credit card debt or just from highest interest rate to lowest interest rate. Because a high interest rate consumer debt means that's more money coming out of your pocket tomorrow, next week, next month. It's just more money today coming out of your pocket. And the avalanche method wants to keep as much money in your pocket. The debt snowball didn't care about interest rates, but the avalanche method does. So you're going to list them highest interest rate to lowest interest rate, and then tack that highest interest rate debt with a vengeance, and then roll that, obviously, those minimum payments into the last one there at the lowest interest rate.

12:49And then at the end of it, you'll be debt-free. Yeah, I hope everyone is writing that down because it's just a great strategy to accelerate paying these off. And it gives you kind of a tried and true formula to get to that point because it's just financial suicide if you carry large consumer debt on credit cards and some of these other bills. Let's talk about this last point here, buying a house you can't afford. How do you define a house that someone can't afford? How does that fit into someone's debt-to-income ratio. Yeah, it's really just about understanding your debt to income ratio and really flushing that out before you go house shopping.

13:22Because a lot of people, again, get into this lifestyle creep. And then all of a sudden you start looking at homes, you get super stoked and you're like, our limit is$400 ,000. Next thing you know, you're looking at homes that are 420, 450, 470. And you think, oh, it's only a little bit more. It's only a little bit more. But that$200, $300 a month in extra house payment just really then puts your debt to income ratio in a completely different place, causing you to not be able to afford that. Hence the term house broke. I wouldn't even know what the percentage of people are in America today that are house broke, but I assume it's very, very high.

14:00You want to look at it as a situation where you want to have the totality of your house payment at that 28 to 30 % of gross income, because a lot of people forget they'll go, oh, the house payment's only$2 ,500. We can afford that. But they forget about PMI. They forget about their HOA. They forget about insurance. They forget about maintenance. All of these things really, really increase your monthly overhead on this house. And most people want to lie themselves down so they can get the bigger house without taking into effect those additional costs that are there every month, year over year, decade over decade.

14:40I would imagine that these rules of this 28 % to 30 % of gross pay would also apply to an apartment complex or someone who's renting, right? Walk me through the importance of keeping that in mind as well. How it relates to renting, it's very similar math that applies. The only difference with renting is you don't have all of the additional fees of maintenance and HOA and you don't have, you know, PMI and all of this, these other factors playing into it. When you're renting, if it's$2 ,500, you know, it's$2 ,500. It's capped. You don't have to mess around with all the labor and upkeep and mowing the lawn or all that.

15:19So there are some advantages, but you still want to prevent that lifestyle creep when you're renting as well. For example here, I mean, imagine you're making$4 ,500 to$5 ,000 a month and your rent payment is$2 ,250 or$2 ,500 a month. I mean, that's 50%. And I can name a bunch of apartment complexes here in Nashville, Tennessee that are that$2 ,100,$2 ,200,$2 ,300 a month for, you know, one bedroom. so unless you're really making 10 000 8 000 a lot of money every single month it's really important to keep in mind these 28 to 30 percent kind of guardrails of gross pay so you're not house poor or apartment poor but because at the end of the day these hundreds of dollars in extra money that you're paying towards your apartment to live in this great spot or have that nice view it only takes$550 a month to max out your Roth IRA.

16:16And if you do that from 35 to 65, you're going to end up with millions of dollars in retirement. So if you think about it, you're living your retirement today by taking this money, you're borrowing from your future to live that today. And that just doesn't make sense to me. Yeah, that's mind-blowing. And wow, that was incredible, Austin. Yeah, the key takeaway always comes back to what you and I preach on a daily basis. And that is you have to invest early and often. And if you don't do that, and you don't set yourself up in a way to where your debt to income ratio is in order, you don't have a budget, you're just not going to find your way to getting those rich habits implemented into your daily lifestyle.

16:57You have to let yourself be able to put away that 15, 20, 25 % into your investment strategies, or you're going to work forever. And when people in their 20s and 30s, they have the luxury of youth. Because if you implement these strategies early on and you stick with them month in, month out, year in, year out, you're just going to wake up one day and look at your accounts and you're going to be like, wow, I'm a multimillionaire because I did it right early on. If you're 26 years old like you and you have the fancy apartment, you have the fancy car, you're living paycheck to paycheck, even though you're having fun, you're just not getting anywhere and you're treading water, then you're one big bad break away from losing it all and going, now what?

17:48And that's why you have to find a way to put away those funds monthly, or you're always going to be broke. Absolutely. Live below your means, have your emergency fund, automate your investing, know what you're investing into both in your 401k and in your Roth IRA, right? These are things we want people to focus on, have a complete understanding of and hopefully tell their friends and inspire more people in their 20s to do this, right? It's so, so, so important. And so, right, don't wait. Analysis paralysis is something we talked about a couple episodes ago because a lot of people feel overwhelmed with all the different things they have to do or just lay out a plan one step at a time.

18:26And it doesn't have to be perfect. It doesn't have to be perfect, but just moving in the right direction is what's really, really important. And something that I do that really helped hold me accountable is bring my friends along. I was telling Robert about this. I've got a friend here named Jacob. He's 29. He's a little bit older than me, but both of us, we share our budgets with each other. We share our investing styles. We share everything that we're like trying to do together to build wealth. And by surrounding ourselves with people that can hold you accountable and are also sort of on this journey with you, keeps you moving in the right direction, which I think is really, really important, especially when we see all the crazy headlines, especially when we see the volatility in the markets.

19:01And especially when we see all our friends on Instagram with the bottle service, posting the cool pictures and you get a little jealous like no man we're good we don't need that we're investing yeah i mean that's that's it i mean the whole time you were talking right there all i could think about is you are the five people you hang around you know and so if the people you're growing with have the same aspirations as you and are going in the same direction you're all gonna rise and bring each other up because too many times it's easy to get comfortable and go back to your old friends that party all the time, that live that lifestyle.

19:39And it's easy to go back to that lifestyle and have fun. But at the end of the day, you have to stick with it. You can have balance, but you have to stick with your plan. Because, you know, me being 30 years older than you, I would hate to be in the situation that thousands of people I talk to a month are in where they're like, I'm 47 years old and I don't have any money. I'm 52 years old and I've only saved$12 ,000. That's just a horrible situation to be in. And that's why we named this podcast Rich Habits. Teach people the right structures, strategies, and habits early on. So then when they get older, they're going to remember the days they listen to our podcast.

20:18And they're going to be thankful because we're trying to give it to everyone in deliverable, actionable chunks so they can take action early and often. Leave us a rating or review. Give us a thumbs up. give us a follow if it's on apple podcast or spotify or i heart media i heart radio whichever platform i think they're on regardless give us a good rating give us a five star let us know what you want us to talk about in the future shoot us a dm at rich habits podcast on instagram with topics and questions and we'll be sure to cover them and as always thank you so much for hanging out with us this week we'll see you on the next episode of the rich habits podcast