Recently, on an episode of my radio show, “Your Money,” I caught up with Charlie Wells, a reporter for the Wall Street Journal and author of the recent article, “The Biggest Money Mistakes We Make – Decade by Decade.”
In his article, Charlie shows how financial errors can vary by age and gives advice for how people can do better. “We hear a lot about how society is changing,” he said. “People are living longer than ever before. Children are living at home longer than they have for decades. I wanted to look at some of the financial issues and pitfalls that we’re making now that society is a little bit different.”
Here’s a closer look at some of the common money mistakes Charlie says people make, decade by decade – and how to avoid them.
1. 20s – Playing It Too Safe
Your 20s should be about investment. You’re just starting out in the workforce. You have decades left to continue being a wage earner. In a nutshell, you have time to take risks. But for a number of reasons, people simply aren’t taking them. A 2016 analysis of millennials by a Georgia Southern University professor found that many of them are sheepish about getting into the stock market. Millennials came of age after 9/11 and unfortunately remember some of the financial trauma that followed.
“The 20s are a time when you really should be investing in stocks, being more aggressive in order to make enough money to have a sizable enough retirement fund,” Charlie said. He suggests target-date funds, which start out with riskier allocations that gradually become more conservative.
2. 30s – Overwhelmed by Complexity
Life becomes complex in the 30s, when people typically start getting married and having children. They are taking on “adult” commitments and want the same lifestyle they remember their parents enjoying when they left home at 18 to go to college. But they forget that it took decades for their parents to reach that standard of living. “The downside is that these people don’t save enough money,” Charlie said. “The money is not in the bank or market accruing more. People take on credit card debt to live a life they can’t afford yet.”
Aspiring parents should stock away as much money as possible, as early as possible, Charlie said, noting that children are a huge expense and there are always unanticipated expenses, too.
3. 40s – Misjudging Big Expenses
People in their 40s are sometimes uniquely “sandwiched” between their children and aging parents – and can be responsible for both. With children, expenses can get out of hand, from sports fees to college tuition. Charlie recommends parents spend no more than 10 percent of their income on expenses for children. Weekly allowances for children can also make them more careful with their money.
As parents are living longer, health complications can start to arise. Charlie recommends keeping a “business relationship” with parents when care needs come up, instead of saying things like, “everything will be okay,” and then taking on a financial burden.
“It’s best to go step by step and look at how to realistically address these health care costs,” he said.
Planning and budgeting for parent care is important, as long-term care costs can be extraordinarily expensive. “Your parents might not be making frequent hospital visits yet, but the moment they become sick is not the moment you want to think about finances,” Charlie said. “Think about 10 or 20 years down the line and start saving now.”
4. 50s – The difficulty of catching up.
When you’re in your 50s, realizing that you don’t have enough money saved for retirement can be scary. You may need a retirement fund to last four decades and your working life is coming to a close in a decade or two. “People are told not to crack into that retirement savings account but for whatever reason in life, such as an unexpected layoff, they’ve done it,” Charlie said.
People in their 50s sometimes start living a higher quality of life, spending more money on themselves, and forgetting that retirement is looming. They need to be sure not to develop a lifestyle that can’t be sustained when they are not earning any income, he said.
5. 60s and beyond: not delegating
It’s potentially risky for adults in their 60s and beyond to make important financial decisions, Charlie said. “Over time we do gain financial wisdom but we start to lose the ability to make financial decisions.” He recommends that people begin delegatingthese decisions in their 50s and 60s, instead of their 70s and 80s, finding trusted advisors or family members to make financial decisions for them later in life. It can be a scary conversation, he said, but it’s an important one to have.
“I received dozens of e-mails on this topic,” Charlie said. “It’s clearly something that people are thinking about. The research is just starting to dive into it. Hopefully in the years ahead financial advisors and academics will have better answers on how to deal with this issue.”
Kent Smetters is the Boettner Professor of Business Economics and Public Policy and faculty director of the Penn Wharton Public Policy Initiative at the Wharton School of the University of Pennsylvania.