Hi, I’m Dan Pham. I’ve spent the last ten years of my career in the San Francisco Bay Area working with teams of product leaders, software engineers, and operations. Today, I’ll be sharing some of the financial mistakes that I made while investing in my 20s in hopes that others may benefit from them or maybe even share their own!
Background: I did not have close access to financial teachers growing up, except by way of Mr. Google and Ms. Reddit, and so the learnings below are based on years of my own readings, experimentation, and personal experiences. I’m writing this now for two reasons:
- This year, after speaking with a financial advisor for the first time, I was surprised to learn that I’m on track to hit my modest retirement goals in the next 10–15 years when I will be a little over 45 years old, and so I wanted to write down my experiences in case it was helpful or interesting to others.
- I’d also like for my son to read this article one day so that he can benefit from thinking about finances early in life and be empowered to manage not just his own money but also his future generations’ wealth.
That said, early retirement aside, no one is perfect and we all make mistakes 🙂 In fact, there’s no better way to learn and grow than by making mistakes, and so without further adieu, here are the top 6 financial mistakes that I made in my 20s and wish I had done slightly differently:
Mistake #1: Getting the 401K Employer Match, but not maxing out my personal allowance every year
When I first joined Google, they offered a very generous 401k match:
- 100% match up to $8,000 or
- 50% match up to the annual maximum contribution
Of course, upon hearing this, I thought to myself, wow, 100% match is basically free money, so I did that as a no-brainer. But I did not max out my allowance every year, because I didn’t think 50% was worth it.
I also was (and still am) a big fan of James Altucher who is pretty anti-401k in his blog, arguing instead that you should invest in yourself or a business instead of your company’s 401k. While it’s purposely written to be controversial and slightly dangerous, there are some merits to what he’s saying, and I respect his personal investing journey. That said, the majority of people in their 20s will not start a business, generate 7 different sources of income, or leave their comfortable corporate job like he did, myself included.
Lesson #1: Every year, contribute the maximum allowable amount to your 401k and re-adjust your spending habits to accommodate a more frugal lifestyle.
Do this whether you have a 5% match, a 15% match, or a 50% or 100% match because the compound interest will grow exponentially in the long-run. For that reason, maxing out your 401K is a safe bet for healthy financial returns at an early age.
Mistake #2: Paying a landlord longer than I needed to. Instead, I should have used my 401K as a Loan for a first home purchase ASAP
While owning a home won’t always be more cost-effective than renting, this was a “mistake” for me in my 20s, because I didn’t even look. I did not buy my first primary home residence in San Francisco until 2015. There are a couple of reasons for this, but I think the main ones were:
I was scared of mortgages due to the 2007 financial crisis, and I blindly believed the news narrative that homes were unattainable to millennials and that we were totally screwed.
In retrospect, working in tech afforded me a larger salary and longer job tenure than the average millennial. I potentially could have bought a starter home using my savings and a 401K Loan as early as 2012.
For those that don’t know, a 401k Loan allows you to take out 50% of your balance for the down payment of your first home purchase.
If I had bought a house in the San Francisco Bay Area in 2012, I would have been a happy camper because real estate home prices kept going up and up after 2012.
Lesson #2: Even though the money in your 401k usually stays invested until retirement age, the 401k Loan gives you early access to liquidity to buy your first house now without early withdrawal penalties.
Lesson #3: You won’t know if you can buy a house unless you do the work and research it on your own. Don’t blindly trust the news reporting on trends and statistics for the general population. Instead, evaluate investments based on your own personal financial situation.
Whether it’s a $600K starter condo in San Francisco or a property outside of California, consider your own situation. You won’t know unless you look.
Mistake #3: Paying off my 3–7% interest rate student loans, instead of holding Google or investing in the stock market instead
To this day, I really regret paying off my student loans too quickly. I joined Google as a Level 2 employee, and my non-Engineer equity offer was 50 Google Restricted Stocks Units (RSUs) vesting over a 4 year period. This would have been worth about $300,000 today (after the stock split), but I spent 4 years paying off my student loans using my equity and savings instead of investing it.
Even if I had put it all into an ETF like SPY that tracks the S&P 500, I would have increased my net worth, and the financial growth of those assets would have outpaced the tiny interest rate I was paying on my student loans. For comparison, since 2010, Google has grown ~20% annually and the SP500 has grown ~13.6% annually.
Lesson #4: There is bad debt, acceptable debt, and productive debt. Paying off high interest debts is usually a good deal, but for lower interest debts like student loans, compare the opportunity costs associated with not being in the market at all.
Today, not including my mortgage, I have ~10% of my net worth in assets which I bought with low interest debt. Because I hold a steady full-time job, this debt is productive to me and within my risk tolerance. If I got laid off, I would immediately sell some investments to pay off the debts to lower my monthly financial responsibilities until I found a new job.
Mistake #4: Gambling on stock options or futures with money I couldn’t afford to lose*
*I repeat, Don’t do it! Having experimented with various forms of stock options trading for longer than 18 months, (thanks, to the beautiful degenerates at r/WallStreetBets), I can safely say in hindsight that it was a mistake.
Unlocking Lambo Mode in my Robinhood account
There’s some further reading you can do about the complexity of options pricing, but I recommend staying far away from stock options unless you will not regret losing the money, have a super human understanding of herd mentality in the stock market, and have a lot of time to manage your positions.
Lesson #5: The complexity and risk/reward ratio for options is usually not worth it. Make sure if you are doing this, you already have a significant nest egg, and you are only using money that you can afford to lose.
While I had some spectacular runs, such as the Apple and Tesla stock splits in 2020 which I bought early and even put some in my Vanguard Roth IRA, the majority of options didn’t pan out for me in the way I thought they would (no matter how smart I thought I was being or how high conviction I was about the direction the trade was going to go.)
Mistake #5: Gambling on risky exotic investments (including cryptocurrency*) with money I couldn’t afford to lose*
In 2018, I gambled on a cryptocurrency called Dragonchain, and the whole cryptocurrency market crashed swiftly after I bought it at the peak of the cryptocurrency bull market. Dragonchain never fully recovered as Bitcoin or Ethereum did, and it was a lot of money for me back then. To this day, I’m still unreasonably skeptical of any cryptocurrency that happens to also have a cute logo ????
Lesson #6: If you are investing in exotic investments, you should already have a significant nest egg and only use money that you can afford to lose.
Cryptocurrency is just one example of an exotic financial investment. There are other types of exotic investments, too, like art, wine, etc. and this learning applies to all of those as well.
Note: Out of fairness here, I do still hold cryptocurrencies in my investment portfolio, but it will not affect my retirement goals significantly if it doesn’t pan out. While blockchain technology is promising and can be used to solve real-world problems, speculating on cryptocurrency is not something I’d recommend unless you’re using money you can afford to lose.
Mistake #6: Neglecting your IRA/Roth IRA, because it’s not part of your employee benefits
When you go to work and you sign up for all your benefits like the 401K, Insurance, Health Benefits, etc, they usually never tell you that you can also invest in a personal IRA/Roth IRA. For this reason, even though I heard about the “Mega Backdoor Roth IRA” in our company mailing lists, I never bothered researching it until I was already in my 30s because I thought it was only for super wealthy Engineers.
The IRA is an individual retirement account under United States law that is generally not taxed upon distribution, provided certain conditions are met.
Lesson #7: Invest in your IRA/Roth IRA every year regardless of your age or income.
The current annual contribution to an IRA/Roth IRA is $6,000 per year. That’s money that can be growing in your tax advantaged retirement accounts or even tax free! I really regret not starting an IRA earlier because $6,000 every year in my twenties has the potential to grow significantly at retirement.
Bonus : By the way, if you’re new to all of this, check out the How to Prioritize Spending Your Money Flow Chart from r/PersonalFinance
Even if you’re in your 20s, or 30s, or 40s or close to retirement age, it’s never too late to start taking care of your financial future. This high quality and comprehensive flowchart pretty much gives you a roadmap of how to plan your savings and investments in “the right way” and goes over a lot of newbie stuff which I glossed over for this article.
And that’s it! Aside from these top 6 financial mistakes and 1 infographic, I’ve almost never made any other financial mistakes (lol just kidding) but this covers the big ones. Hope you found these learnings helpful or educational at my expense!
Also, as a personal finance nerd, I always enjoy hearing what other people are doing and learning, so if I missed any financial tips and tricks that you’ve picked up along the way, let me know in the comments section.