How to overcome the top 7 money mistakes millennials make
NOVEMBER 8, 2017 AUTHOR: SHAUN
No one’s financial situation is perfect, including millennials. Learn about the seven biggest financial mistakes specific to millennials and how to improve your finances!
How would you describe most millennials’ financial situation?
Stereo-typically, would say they’re “excessive spenders”? Burdened with debt? Dare I say, “financially uneducated?
What if I were to tell you Millennials are some of the best savers out there.
A recent study by Bankrate showed that “millennials were more than twice as likely to set a spending cap in order to save more, compared with older generations.” The organizations chief financial analyst went on to say that “millennials have an inclination toward saving that we have not seen from our predecessors.”
Wow – finally some good news for the millennial generation!
But before we jump to conclusions, I don’t think everything about Millennials’ finances is perfect. Sure, they might be great savers, but how about the rest of their finances? Do they invest? Can they manage credit?
As a millennial myself, I took the time to learn from friends and colleagues, staring long and hard at the financial issues of this upcoming generation. And boy, did I find out lots!
(Some of the items apply to all generations – so if you’re not a millennial, don’t tune out! Just about everyone can learn something from the lessons below.
Below I’ve listed the top 7 money mistakes millennials make. So listen up!
1) They use credit cards as a loan
Credit cards, when used correctly, are beneficial. They offer convenience (tap & go payment or allow you to buy online), and some even offer rewards for using it.
Their primary use is to help you avoid carrying cash, and bridge payment for a few days. They are meant for short-term purchases (and by short term I mean you pay it off before the bill comes due!)
They need to be treated with respect though! Credit cards carry some of the highest interest rates you’ll ever pay! So try, at all costs, to avoid carrying a balance.
If you currently find yourself burdened by high credit card debt, try to pay it down as soon as possible! It’s probably the best financial move you could ever make.
If you don’t have any savings set aside to pay it down, move your credit card balance to something with a lower interest – like a loan or line of credit. Most banks offer them, and at over half the interest you’d pay on a credit card, you’ll save yourself a lot of money!
2) They don’t set aside savings from each paycheck
What’s one of the best ways you can ensure you build wealth? Pay yourself first!
I’ve mentioned this in earlier posts, but by paying yourself first, you ensure that saving is a priority.
To be honest, it’s a hard habit to maintain! There’s always the temptation to spend any leftover money in your bank account. That’s why it’s critical you start building a habit as soon as you enter the workforce.
Automating the process makes this more convenient as well. Set up a direct deposit the day your paycheck comes in, and you’ll never even have a chance to spend it!
How much should you aim for? I recommend setting aside at least 15% of your take-home pay into a combination of savings and investments. This should be plenty to build an emergency fund to take care of one-off repairs, as well as save for long-term goals like retirement (learn more about how to start in this post!).
15% really isn’t a lot of money when you start your first job. Maybe it means you’re putting aside $125 from every paycheck. But if you continue with that habit, and build a mindset that you need to pay yourself first, you won’t hesitate to put away $200, $300 or even $400 per paycheck as your salary grows!
3) They max out on student debt
I’m all for personal development and life experiences, but would-be students really need to do the math to ensure the amount of money they spend on college is worth the salary they’ll make in their job.
It just doesn’t make sense to rack up $80K in student debt to take on a job that will only earn you $30K a year to start, and maybe $60K a year at its peak. Remember, that $30K per year is before taxes and living expenses!
Now don’t get me wrong, I wouldn’t classify student debt as “bad debt” entirely – after all, it’s an investment that can help propel you into a higher earning career. There’s also a lot of great personal development that happens through college that’s critical to building social skills and leadership potential. But there becomes a point where too much debt, no matter how “good” it is, becomes hindering.
Do the math, and figure out what the right amount of debt is for you, and your future profession. And while in school, find ways to keep both your borrowing and spending in check.
Take on a part-time job. Work hard in school that you earn scholarships. Rent a place with several friends, so your expenses are lower. There are tons of options to be creative.
And PS – despite how it’s portrayed, annual spring break trips down south are a luxury – it’s OK if you miss out on them. When you’re 30 years old, it won’t matter anyway.
4) They assume saving and investing are the same thing
Here’s another point to be very clear on – saving and investing are very different!
They’re both essential to do, but it’s important to know both their benefits and limitations.
I like to think of it this way – savings is money set aside for future use, while investments are money put to use.
Savings are often intended to build a cushion in case things go wrong (i.e. an emergency fund). It can also be money that’s set aside for a future expense (i.e. school, a car, a house, etc.).
Because you want to ensure you don’t lose money on it, it’s best to park this money in a savings account, or a very low-risk investment. Doing so ensures your money is guaranteed to be there.
The downside? Unfortunately, you won’t earn much interest from it.
Investing, on the other hand, is when you put your money to work. You lock it up by buying some form of an asset with the goal of making money off it.
One of the critical differences with investing is you need to be entirely sure that you won’t need access to this money for at least the next 5-10 years.
Why so long?
Investments go through cycles of ups and downs – it’s very typical, and you should count on it. Over the long-term, if you invest wisely, you should see some handsome gains, but month-to-month, and year-to-year you’ll see fluctuations. Because of this, you need to be able to ride out the wave over the long-term.
Mistaking savings for investing means that you won’t ever realize long-term gains. You need to tap into the investing market to accumulate wealth. There’s no sense in having all your money locked away collecting dust! Be sure to put at least some of it to work.
5) Don’t max out on benefits (incl. employer matching)
Morneau Shepell, a firm that provides human resources consulting services in North America, reported about one-third of employees who are lucky enough to have access to employer matching savings programs don’t even bother to opt in.
This one I was really shocked at. This is free money.
For those people who are lucky enough to have access to any form of employer matching program (savings, stock, etc.) do absolutely everything you can to take advantage of it! Delay investing elsewhere. Pull your money from your savings account. Heck, even borrow from the bank! There is no other place you’ll find free money like this.
Think about it for a second – if you have an employer, willing to match your contributions at 50% (50 cents for every dollar) that’s the same as a 50% return on your investment just by putting money in! Not to mention the actual benefit you’ll get from investing in the first place.
Even at the worst-case scenario, you borrowed the money from a bank, at say 8-10% interest, you’d still be further ahead.
Please, please, please, do yourself a favor and try your best to maximize any employer matching programs.
6) They assume budgets are for old people… or there’s no value in them
Just about everyone can benefit from tracking spending and creating a budget.
Now I hear you, the word budgeting can make you cringe. It belongs in the same camp as the dentist and flossing. You know you should do it, and you know all the right reasons why… however, it’s easy to avoid.
But my question to you is this – how do you plan on saving if you don’t create a plan?
It’s quite strange – just about every other goal starts with a plan… yet we treat our finances differently. If you wanted to lose weight, it’d make sense to build a workout schedule and maybe even a meal plan. Very few of us would jump into the gym head-first for the first time and succeed! Trying to save is no different. Better saving starts with better budgeting.
Related post: The one thing most people forget when budgeting
7) They don’t understand #1 money lesson – compound interest
Compound interest is the most essential money lesson you’ll ever learn. Period.
Why is it so powerful? There are two sides to it. It’s the #1 key to unlock serious wealth, or if you’re not careful, it can cost you a lot of money.
Let me explain…
There are two forms of interest – Simple interest and Compound interest. Despite the naming convention, both are easy to understand.
Think of simple interest as “interest-on-initial” money. It is very straightforward and relies only on the initial amount you owe/invest. For example, 5% simple interest on $100 is $5.
Compound interest, on the other hand, relies on two variables. It is not just “interest-on-initial“, but it’s also “interest-on-interest“. Interest grows exponentially because of both factors. It has a “snowball effect” and gets bigger with time.
It’s a small difference that has an enormous impact on your money – in both a good and bad way.
When you invest long-term, you can build a nice nest egg because of the “snowball effect.” As you invest over the long-term, time becomes your friend – by the time you retire, compound interest has helped earn you a good sum of money!
That same idea of “interest-on-interest” is a bad thing though when you borrow money. If your debts are left unpaid, you’ll not just owe the money you borrowed, but money on top of money.
Compound interest is so compelling. Waiting to invest means you’ll lose out on a lot of money (read my post here). Someone who invests even a small amount can earn a lot over 20 or 30 years! The opposite is true for those who borrow money though – be sure to pay it off as soon as possible or it can cost you a lot of money!
Think it through
- Which of the items above have the most impact on your finances?
- Knowing what you know now, is there anything you’d do differently?
- What steps can you do to help educate others on these common mistakes?
- Should you pay down debt or invest? Part 2 – Find out how to start now!
- Learn why Einstein called this the 8th wonder of the world
- Learn how to pay yourself first and save more money
- How not to overspend and save money
- The high cost of waiting to invest – why are you waiting?
- The one thing most people forget when budgeting
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