002: 3 Money Mistakes Most People Make in Their Twenties
Introduction
In Episode 2 of Wealth Notes, we explore three fundamental financial mistakes that most people make in their twenties—and how these mistakes continue to impact people at every age. Whether you're just starting your financial journey or correcting course later in life, understanding these concepts is essential for building long-term wealth.
Listen to the full episode above, or read the transcript and resources below.
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Welcome back to Wealth Notes, financial clarity, one note at a time. This is episode two, and today we're exploring three major money mistakes that most people make in their twenties. Even if you're not in your twenties anymore, these mistakes apply at any stage of life, so stick around.
By the end of this episode, you'll understand what these mistakes are, why they're so common, and most importantly, how to avoid them or correct them if you've already made them. Let's dive in.
Before we get started, a quick reminder. This podcast provides educational content only. It is not financial advice. I'm not a financial advisor, and you should always consult with a qualified financial professional before making any major financial decisions. What we discuss here is meant to help you understand concepts so you can make informed choices.
Alright, let's talk about mistake number one. Not understanding the difference between income and wealth.
This is probably the most fundamental mistake, and it shapes everything else about how people handle money. Here's what happens. Someone gets their first real job, maybe they're making forty thousand or fifty thousand or sixty thousand dollars a year, and suddenly they feel wealthy. They start spending like they're wealthy. New car. Better apartment. Eating out constantly. Upgrading their wardrobe. Subscription services for everything.
The problem is, income is not wealth. Income is what you earn. Wealth is what you keep. You can have a high income and zero wealth if you spend everything you make. And you can have a modest income and build significant wealth if you're intentional about saving and investing.
Financial author Thomas Stanley, who wrote The Millionaire Next Door, spent years studying wealthy Americans. One of his key findings was that many millionaires don't look like what you'd expect. They're not driving luxury cars or living in mansions. They're living below their means, saving consistently, and building wealth slowly over time. Meanwhile, people with high incomes but high spending have impressive lifestyles but very little actual wealth.
So what does this mean for you? It means you need to focus on your savings rate, not just your income. Your savings rate is the percentage of your income that you keep rather than spend. If you make fifty thousand dollars a year and save five thousand dollars, that's a ten percent savings rate. If you make one hundred thousand dollars a year but save nothing, your savings rate is zero, and you're not building wealth.
The goal is to increase your savings rate over time. Start wherever you are. If you're currently saving nothing, aim for five percent. If you're at five percent, push for ten percent. If you're at ten percent, challenge yourself to hit fifteen percent. Every percentage point matters because it's money that's working for you instead of disappearing.
Here's a practical step you can take today. Calculate your current savings rate. Look at your last month's income and your last month's savings. Divide savings by income, then multiply by one hundred. That's your savings rate. Once you know that number, you can work on improving it.
Now let's move to mistake number two. Lifestyle inflation, also called lifestyle creep.
Here's how this plays out. You get a raise at work. Maybe you go from making forty five thousand to fifty two thousand. That's seven thousand more per year, or about five hundred and eighty three dollars more per month. Exciting, right? But here's what happens to most people. Within a few months, they've absorbed that entire raise into their lifestyle. Maybe they upgrade to a nicer apartment that costs four hundred more per month. Maybe they finance a better car. Maybe they just start spending more on dining out, entertainment, and shopping.
A year later, they're making more money, but they don't feel any wealthier. They're not saving any more than before. They've just inflated their lifestyle to match their new income.
This pattern repeats every time income increases. Promotion? Lifestyle inflates. New job with higher pay? Lifestyle inflates. Bonus? Spent immediately. And the result is that people can go from making forty thousand in their twenties to making one hundred thousand in their forties and still feel like they're living paycheck to paycheck because their spending has kept pace with their income.
The alternative approach is to practice intentional lifestyle inflation. When you get a raise, decide in advance how much of it you'll save and how much you'll spend. A simple rule is the fifty fifty split. If you get a five hundred dollar per month raise, increase your savings by two hundred and fifty dollars and allow your lifestyle to inflate by two hundred and fifty dollars. This way, you're building wealth faster while still enjoying some of the benefits of earning more.
Or you can be even more aggressive. Some people practice the eighty twenty rule with raises. Eighty percent goes to savings and investing, twenty percent goes to lifestyle. If you can do this consistently, you'll build wealth incredibly fast while still allowing yourself small improvements in quality of life.
Here's the key insight. Lifestyle inflation isn't inherently bad. The problem is unconscious lifestyle inflation, where your spending automatically rises to meet your income without any intentional decision making. When you're intentional about it, you can enjoy some lifestyle improvements while still prioritizing wealth building.
A practical step for this one. If you're expecting a raise or bonus in the coming months, decide right now how you'll allocate it. Write it down. Commit to saving a specific percentage before you ever see that money hit your account. This removes the temptation to spend it all.
Now let's talk about mistake number three. Delaying investing because it feels too complicated or scary.
This mistake costs people more money than almost anything else, because of something called compound growth. Compound growth is when your money earns returns, and then those returns also earn returns, creating a snowball effect over time.
Here's a simple example. Let's say you invest five thousand dollars at age twenty five, and it grows at an average of seven percent per year. You never add another dollar to it. By age sixty five, that five thousand dollars has grown to about seventy four thousand dollars. Now let's say you wait until age thirty five to invest that same five thousand dollars. Same seven percent growth. By age sixty five, it's only grown to about thirty eight thousand dollars. You cut your final amount almost in half by waiting just ten years.
That's the power of time in investing, and it's also the cost of delay. Every year you wait is a year of potential growth you're giving up.
So why do people delay? Usually it's one of three reasons. First, they think they need a lot of money to start. Second, they're intimidated by the process. Third, they're afraid of losing money.
Let's address each of these. First, you don't need a lot of money to start investing. Many brokerage platforms now allow you to start with as little as one dollar. You can buy fractional shares of stocks or invest in low cost index funds with minimal amounts. The important thing is to start, even if it's small.
Second, the process is much simpler than it seems. Opening a brokerage account takes about fifteen minutes. Buying an index fund is as easy as clicking a few buttons. You don't need to understand complex financial theories or pick individual stocks. Simple, low cost index funds that track the overall market are a proven strategy for long term wealth building. Financial expert John Bogle, who founded Vanguard and created the first index fund, spent his career advocating for this simple approach. His research showed that most people do better with simple, low cost index funds than trying to pick winning stocks or hire expensive money managers.
Third, yes, investing involves risk. The market goes up and down. But over long periods, historically, the market has trended upward. If you're investing for decades, not months, short term drops don't matter as much. And keeping all your money in cash has its own risk, which is inflation slowly eroding your purchasing power.
Here's a practical step. If you're not investing yet, commit to opening a brokerage account this week. You don't have to fund it immediately. Just get the account open. Fidelity, Vanguard, and Schwab are all reputable options with low fees and good beginner resources. Once the account is open, the barrier to actually investing becomes much lower.
Then, start small. Even if it's just fifty dollars a month into a broad market index fund, that's better than nothing. As you get more comfortable and your income grows, you can increase the amount.
Let's recap these three mistakes.
Mistake number one is confusing income with wealth. Income is what you earn, wealth is what you keep. Focus on your savings rate, not just your paycheck.
Mistake number two is unconscious lifestyle inflation. When your income increases, your spending automatically increases to match it. Instead, be intentional about how much of each raise you save versus spend.
Mistake number three is delaying investing because it feels complicated or scary. Time is your biggest advantage when it comes to compound growth, and every year you wait costs you potential wealth.
Now, if you've already made one or more of these mistakes, don't beat yourself up. Most people make all three of them at some point. The good news is, you can start correcting them today.
If you've been confusing income with wealth, calculate your savings rate and commit to improving it by even one or two percentage points.
If you've let lifestyle inflation eat all your raises, make a plan for the next one. Decide in advance how you'll split it between savings and spending.
If you've been delaying investing, take one small action this week. Open a brokerage account, or if you already have one, set up an automatic monthly transfer of whatever amount feels manageable.
Financial education is about understanding concepts, and then applying them to your own situation. You now understand these three mistakes. The question is, what will you do with that knowledge?
Before we wrap up, let me tell you what's coming in episode three. We're going to cover how to calculate your real net worth in about ten minutes. Net worth is the single most important number in personal finance, and most people have never actually calculated it. We'll walk through the process step by step so you know exactly where you stand financially.
Head over to wealth notes dot co for today's show notes. You'll find links to resources we mentioned, including information on the brokerage platforms we discussed, a simple savings rate calculator, and more. If I referenced any books or concepts, you'll find those links there too, including affiliate links that help support this podcast at no extra cost to you.
If you found this episode helpful, share it with someone who's navigating their twenties or anyone who could benefit from understanding these money mistakes. The more people who understand these concepts, the better off we all are.
Remember, this is educational content, not financial advice. Always consult with a qualified financial professional before making major financial decisions.
Thanks for listening to Wealth Notes. New episodes drop every Tuesday and Friday. Subscribe so you don't miss them.
Financial clarity comes one note at a time. I'll see you in episode three.
Key Takeaways
Mistake #1: Confusing Income with Wealth
Income is what you earn. Wealth is what you keep. This distinction might seem obvious, but it's the foundation of financial success. You can have a six-figure income and zero wealth if you spend everything you make. Conversely, you can build significant wealth on a modest income through consistent saving and investing.
Financial author Thomas Stanley documented this phenomenon in his groundbreaking research. In The Millionaire Next Door, Stanley revealed that many millionaires don't live flashy lifestyles. They drive modest cars, live in average neighborhoods, and prioritize saving over status symbols.
Action Step: Calculate your savings rate by dividing your monthly savings by your monthly income, then multiply by 100. If you're at 5%, aim for 10%. If you're at 10%, push for 15%.
Mistake #2: Lifestyle Inflation (Lifestyle Creep)
Lifestyle inflation occurs when your spending automatically rises to match your income increases. You get a $10,000 raise, and within months, you've absorbed it entirely into a nicer apartment, better car, or elevated daily spending. A year later, you're making more but not saving more.
The solution isn't to never improve your lifestyle. It's to be intentional about it. When you receive a raise, decide in advance how to allocate it:
50/50 Split: Half to savings, half to lifestyle improvements
80/20 Split: 80% to savings and investing, 20% to lifestyle (aggressive wealth building)
Action Step: Before your next raise or bonus, write down your allocation plan. Commit to it before the money hits your account.
Mistake #3: Delaying Investing Due to Fear or Complexity
Every year you delay investing costs you potential wealth due to compound growth. Consider this example:
Invest $5,000 at age 25 with 7% annual returns = ~$74,000 at age 65
Invest $5,000 at age 35 with 7% annual returns = ~$38,000 at age 65
Waiting just 10 years cuts your final amount nearly in half.
Most people delay because they think they need lots of money to start, the process seems intimidating, or they're afraid of losses. The truth:
You can start investing with as little as $1 (fractional shares)
Opening a brokerage account takes about 15 minutes
Simple, low-cost index funds work for most people
John Bogle, founder of Vanguard and creator of the first index fund, spent his career advocating for simple investing strategies. His research showed that low-cost index funds that track the overall market outperform most actively managed funds over time.
Action Step: Open a brokerage account this week, even if you don't fund it immediately. Start with whatever amount feels manageable—even $50/month makes a difference.
Resources & Tools
Books Referenced:
The Millionaire Next Door by Thomas Stanley * - Groundbreaking research on how everyday millionaires actually build wealth
The Little Book of Common Sense Investing by John Bogle *- Simple, proven investing strategies from the index fund pioneer
*Affiliate link
Recommended Brokerage Platforms:
Fidelity - No account minimums, excellent research tools, strong customer service
Vanguard - Founded by John Bogle, known for low-cost index funds
Charles Schwab - User-friendly platform, no commissions on stocks and ETFs
Savings Rate Calculator:
Free Savings Rate Calculator - Simple tool to calculate what percentage of your income you're actually keeping
Budgeting Tools to Combat Lifestyle Inflation:
YNAB (You Need A Budget) - Zero-based budgeting app that helps you assign every dollar a job
Mint - Free budgeting tool that tracks spending automatically
EveryDollar - Simple budgeting app based on the envelope system
Investment Education:
Bogleheads Wiki - Free community resource for index fund investing philosophy
Investor.gov - SEC's investor education website with unbiased information
Next Steps
Now that you understand these three critical mistakes, here's how to take action:
This Week:
Calculate your current savings rate
If you're expecting a raise or bonus, create an allocation plan
Open a brokerage account (or schedule time to do it)
This Month:
Increase your savings rate by at least 1%
Set up automatic transfers to savings/investment accounts
Review your spending for unconscious lifestyle inflation
This Quarter:
If not investing yet, make your first investment (even if small)
Read one of the recommended books
Evaluate your progress and adjust as needed
Discussion Questions
We'd love to hear from you:
Which of these three mistakes have you made?
What's your current savings rate, and where do you want it to be?
What's keeping you from starting to invest (if you haven't yet)?
Join the conversation using #WealthNotes.
Listen to More Episodes
Previous Episode: Episode 1: What is Wealth Notes? Start Here
Next Episode: Episode 3: How to Calculate Your Real Net Worth in 10 Minutes
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About Wealth Notes
Wealth Notes is a financial education podcast that breaks down budgeting, side hustles, debt strategies, credit building, and investing basics in 10-15 minute episodes. No jargon. No overcomplicated theories. Just straightforward financial education.
New episodes every Tuesday and Friday.
Disclaimer: This podcast provides educational content only and is not financial advice. Always consult with a qualified financial professional before making any financial decisions.
Keywords: money mistakes, financial mistakes twenties, lifestyle inflation, savings rate, compound interest, investing for beginners, wealth building, income vs wealth
