A couple of weeks ago I had a discussion with my financial advisor about my retirement accounts that seem to be going nowhere. Though I am investing a thousand dollars a month in one of those accounts the returns have left a lot to be desired. As we looked closely at the account it was fairly easy to see the problem was essentially one money losing mutual fund. My emotions were telling me to sell my entire position in that underperforming mutual fund and reinvest it into a better performing one. Makes sense, right? But, my advisor advocated a different point of view. His message was simple, “don’t follow the crowd”.

Now that I have reached fifty years of age, I have become more more reflective about the financial decisions that my wife and I have made over the years. We’ve made some good ones for sure. We purchased our first two homes while we were still in our twenties. We’ve amassed multiple hundred thousand dollars in retirement savings. Outside of our mortgages, we carry little debt. And, we have a decent amount of money in emergency savings. We’re proud of those things.

But, we have also made some major money gaffes over the years that have diminished our current financial standing. We sold our first house in a major metropolitan market to just break even without even considering the possible benefits of renting it out. We purchased new cars and to make matters worse in one case even financed one for six years with an insane interest rate—that was crazy. On multiple occasions in our early years, we borrowed money out of our retirement account. I could go on. But, the point is that we’ve made many errors, large and small, when it comes to financial acumen.

So, when my current financial advisor said “don’t follow the crowd”, I wanted to hear him out. Ultimately, I decided to follow his advice. I will not add new money to this disappointing fund. But, I will resist the impulse to sell when others sell. I will maintain my wits about me and stick to my diversification strategy. I won’t follow the crowd.

As I think about the financial mistakes that my wife and I made over the years, many of them are a result of following the crowd. We sold that house rather than renting it because everyone was selling and buying bigger. We bought the new car because other young professionals in our age cohort were doing the same. We borrowed money from our retirement savings because pundits were advocating the benefits of borrowing from yourself rather than from others. In no instance did anyone that I knew at the same tell me why all of these might be bad ideas—those I did have some idea of the downside of borrowing from my retirement account.

So, here we are all of these years later. We are blessed in many ways, including financially. But, many of those poor decisions that we made as young adults have compromised our wealth strategy. It is so hard to recover from some of those decisions.

With that in mind, I’ve identified the five financial mistakes young adults make and how you can avoid them. My hope is that when you reach that fifty threshold and what are supposed to be the “golden years” that you actually have that gold. Though it is ideal to adopt these strategies when you are young, it is never too late to start.

Mistake #1: Carrying a balance on your credit card

Credit cards are the bane of your wealth creation strategy. Don’t get me wrong. I’m not anti-credit card. I don’t believe that you shouldn’t have any. In fact, I’d advise you to have one major credit to both build your credit history when you’re young and in case of unavoidable emergencies. The problem, however, is that for many people credit cards create an illusion—a false sense of capacity.

Here is the reality. If you have to put something on a credit card to afford it, you can’t afford it. The situation then worsens as you are unable to pay the full balance when the payment is due. This, of course, triggers the 21-24% interest rate. When you then make minimum monthly payments to fulfill this obligation, you end up paying much more for the actual item that its’ list price.

My advice to young adults is to have one single credit card, either a Visa or MasterCard because both are accepted virtually everywhere. If you have more than one credit card, cancel them. And, no, you don’t need to have department store cards. The overall cost of credit cards is not worth the 10% savings they give you on those twice yearly sales.

Content yourself with a credit limit no greater than $1000. If the credit card company tries to raise it, tell them to put it back at $1000. This gives you a security blanket in the case of a true emergency before you’ve accumulated your own emergency savings.

Pay the full balance every month. When you do this you avoid paying any interest at all. The credit card company is essentially loaning you money for free. They make their money off of the victims who carry a balance. But, that won’t be you.

Mistake #2: Buying new automobiles

Next to credit cards, buying new cars may be the biggest black hole into which young people throw their money. It is actually absurd. Automobiles are depreciating assets. The minute that you drive a new car off of the lot, it is less valuable than when you got into the car. I like the way this is described on the Trusted Choice website. It says “Consider this: The moment you drive your new car off the lot, it will depreciate by as much as 11 percent of its value. That means that if you purchase a $20,000 vehicle, it will lose as much as $2,200 in value just by the simple act of your driving it home.” In any other scenario, you would think someone was crazy if they gave up $2200 in value for a short drive home. Yet the thrill of getting that new car has such an emotional appeal for most that we lose rational thought.

The solution is simple. Buy a late model used car. Purchase the extended warranty if you’re extremely worried about purchasing a “lemon”. The first two cars that my wife and I purchased in our twenties were new cars. We thought that was the logical thing to do. Well, when you know better, do better. We’ve not purchased a new car in more than twenty years and we have yet to regret the decision.

Mistake #3: Spending your entire paycheck

Young adults are on average not saving money. In fact, the Wall Street Journal, Census Bureau suggests adults under the age of 35 (Millenials) have a negative savings rate (-1.8%) thanks in large part to the crippling effect of student loan debt. While this age group has the most unemployed people in the U.S., so many of those who are employed live paycheck to paycheck.

The issue of course is not just about the revenue coming in. A bigger factor may be spending. Young adults are spending too much money. Forbes magazine reports that “Millennial college students (without full-time jobs) spend $784 a month on discretionary expenses, especially food and entertainment, according to the Mooslyvania marketing agency. Millennials are the largest demographic purchasing new technological gadgets and fashion apparel. And their spending on jewelry increased 27% in 2011, according to American Express Business Insights. They even start riots at outside retail malls over $200 limited-edition Air Jordan sneakers.”

It has long been said that young adults’ penchant for immediate gratification is robbing them of their long-term security.

Employed young adults must enforce discipline on themselves to consistently save some of their paycheck. If that means fewer cable channels, a lesser featured smart phone, of less travel then so be it. A good goal is to save ten percent of each check once you’ve pared down your spending. If ten percent is impossible then get as close to that as possible. If you cannot save now, then you must decrease your spending to the point at which you can save.

One way to make it automated is to have a regular amount deducted from each paycheck that goes directly into a savings account. And, then identify someone to keep you accountable for savings account goals.

Using their own money to pay a mortgage

My wife and I recently counseled a young twenty-something couple who at the time were preparing to move from one rented apartment to another one. Our message to them was simple to this couple who felt that they lacked the finances to purchase a home. Our advice, “buy a house that somebody else pays for”. They didn’t get it at first.

Honestly, I may not have gotten it either when I was their age. But, if I knew then what I know now, my entire mindset would have been different. The smart individual uses other people’s money to create their own wealth. Real estate is an excellent way to do this. But, it requires thinking differently than the crowd.

The reality is that there are first time home buyer programs such as those sponsored by the Federal Housing Administration (FHA) that minimize the down payment requirement (3.5% of purchase price) and allows for seller assistance of 6%. Essentially, this means that if the person can accumulate 3.5% of the purchase price then closing costs can be wrapped into the total loan amount.

The next step is simply to find a multi-unit property where you will occupy one unit and rent out the other. The property should be in an area where the amount that you can collect in rent pays for most if not all of your monthly mortgage payment. Of course, you also get the tax benefit of writing off real estate taxes that are paid on the property (even though it is really your tenant that really did the paying). You’re a genius!

Mistake #5: Ignoring your credit report

The final mistake that has major impact on the financial standing of young people is ignoring the credit report. There are three credit reporting agencies (Equifax, Experian, and TransUnion). These bureaus compete to capture, update and store credit histories on most U.S. consumers. They are very influential because financial institutions rely on the credit scores (FICO scores, ranging from 300 to 850) generated by one or more of these bureaus to determine how big a credit risk you are, if you will be approved for a loan, and what the terms (e.g., interest rate) of that loan will be.  The higher your score the more likely you are to get the most favorable credit terms (which generally means paying less interest).

Many young people are not aware that the missed payments on credit cards, student loans, and other debt obligations are having a negative impact on the credit report. In this instance, ignorance is not bliss. Take steps to obtain your credit score. It has never been easier—or cheaper to obtain your actual score. Many credit card companies offer this information. More than 50 million people are now finding FICO scores on their monthly credit card statements, according to the Consumer Financial Protection Bureau.

Forbes.com identifies several websites (CreditKarma.com, CreditSesame.com, and Credit.com) from which you can obtain free credit scores. Bill HardeKopf, CEO of Lowcards.com says “It’s probably the most important numerical figure that you get once you’ve stopped your education.” So, while your peers are oblivious to the impact of their FICO score, you can take the steps to maintain a score that positions you for success.

So, there are the five financial mistakes that young adults make and how to turn it around. I hope that this has been helpful for you. I hope you have gotten the sense that it is important to shift the paradigm from thinking about month to month to considering long-term wealth management. That makes all the difference. The key, however, is to do exactly what my financial advisor suggested, “stop following the crowd”.

Please leave a comment and let me know what is and isn’t helpful. Also, if you have other ideas that have worked for you, please let me know.

Don’t forget you can get your FREE copy of “The 10 Steps to Your Extraordinary Influence” at haroldarnold.com