The word "millennial" is often used to describe people who are born between the years of 1980 and 2000. Millennials are facing a unique set of challenges when it comes to finances, which can make it difficult for them to reach their goals.
In fact, many financial mistakes that millennials make stem from things like college debt or lack of financial education.
The good news is that there are plenty of ways you can avoid making these same mistakes, as we will discuss in this article!
1. Not saving enough money
Millennials are not saving for retirement as much as they should be. Around 40% of this generation has nothing saved at all, which is a problem considering the average retirement age for millennials right now is around 61 years old!
It's important to start saving early and regularly in order to avoid running into financial trouble later on down the road. So even if you can't save that much each month, make sure you are putting something away so it can continue to grow over time.
The best way to do this without sacrificing too many luxuries (or necessities) is by setting up an automatic withdrawal from your checking account directly into your savings or IRA account every month.
This will help prevent you from forgetting about it until it's too late, it will also reduce the temptation to spend it on frivolous things.
2. Spending money on "toys" instead of essentials
Millennials are spending their money on things like expensive cars and designer clothes while sometimes forgetting about the basics of life like food and shelter.
It's better to drive an older car or take the bus than to have thousands in debt payments every month. You'll be thankful when you're not being charged 18% interest rates!
Your cell phone bill might seem like it's too low because you went with the cheapest plan, but think about how much money you could save if instead of buying designer jeans (which will go out of style quickly) put that $50 towards your student loans!
3. Buying too much house
Many millennials often buy houses too big or fancy for them to afford, only to find themselves underwater with debt later on. Make smart investments in your future!
One of the top reasons why people go bankrupt is through credit card debt created by home equity loans. Excessive expenses like utilities, taxes, and mortgage payments equate to too much of a burden on household finances.
So while it's not necessarily bad to buy too much house, remember that getting into too much debt can lead to bankruptcy which is very bad.
In this economy we also need to consider the following:
- Purchasing a house means you have an additional responsibility for securing that house from things like theft or disaster damage.
- It will be more difficult or impossible for you to save money if the bulk of your paycheck goes toward housing costs (mortgage, taxes, etc.).
- Property value fluctuates, and you could end up financially underwater, which means if you ever wanted to sell your house for some reason (e.g., job relocation), you'd have to sell it for less than you paid.
- The price of housing is not always tied to inflation, which means that even if you feel like you're making more money as you age, the price of housing may increase faster than your income.
4. Getting into credit card debt without a plan in place for paying it off
Younger people have a tendency to get into debt by using credit cards as an easy way to purchase items they can't afford now but will have to pay back later when interest rates kick in.
While credit cards can be an easy way to secure a loan, millennials must keep in mind that the interest rates on these loans are high and it's best not to use them as a form of payment.
The biggest financial mistake younger people make is entering into debt without knowing how they're going to pay it back or by getting themselves into more debt than they can handle.
A lot of times when millennials have too much credit card debt, their lack of money management skills leads them down a spiral where they end up being unable to do anything about their debts because all their income goes toward servicing those debts with no room left for savings.
It helps tremendously if young adults start saving early so that eventually there will be enough funds generated from investments and compound interest to pay off debts and buy a house.
If not, they'll be stuck renting for life which is very expensive if you're living in the US.
Learn more by reading
6 Tips to Live Debt Free
5. Living beyond your means
This is a common mistake that many people make, regardless of age; living beyond your means happens when you spend more than you earn each month, which puts you at risk for bankruptcy if something goes wrong financially.
Millennials have a habit of following trends and buying expensive things they don't really need to impress their friends or fit in. This can be very dangerous financially speaking, as it's possible for millennials to get into credit card debt if they're not careful about how much money they spend on unnecessary goods.
When you live beyond your means every month without putting aside some savings first, the consequences are clear: You'll never reach financial independence because you always depend on someone else (your employer) for income.
There will always be bills and debts piling up until there is no way out but bankruptcy at that point. Living within your means simply requires willpower and budgeting skills; In order to make sure this doesn't happen, young people should try to set aside a certain amount of money for savings each month.
6. Failing to save early enough
Most experts say that it's never too late to start saving for retirement, the earlier you start the better because compound interest will work in your favor over time.
If you're currently 30 years old and want $100K saved up by 65 years old (when you plan to retire), the formula is $100K ÷ (65 - 30) = approximately $3600 per year.
That means if you can save just one dollar every month, by saving money each day for seven years, then your annual contribution would be around $3000 -- more than enough to reach your goal of retiring with a million dollars in the bank at 65.
The most important part about investing early on is not trying to get rich quickly but simply being patient and seeing how much time compound interest has before it starts working against you.
You might feel motivated now because there are still many decades left until retirement age but don't forget that those days will pass quickly.
Find out more by reading
How much should you have in your retirement?
7. Having too many student loans to pay off
Having too many student loans to pay off is a bad thing and can oftentimes lead to bankruptcy.
In 1983, the United States Congress passed the Perkins Loan Program. This program was created as an easier way for students or their families to finance a college education by taking out federal educational loans.
The Perkins Loan Program offers students an interest rate of 5%. Basically, this means that if you have received a loan through the Perkins Loan Program, your monthly repayments are much lower than with other standard federal educational loans like Stafford Loans (interest rate is 6%) or Parent PLUS Loans (interest rate 9%).
Owning student loans is not a bad thing and education has an opportunity cost. The problem comes when the debt becomes unmanageable or you can't make it into an educational institution so that you are in a lower-paying position than what you could be if you had one.
Educating oneself may be difficult, but it's also worth it in the end because without formal schooling, your earning potential will be much more limited and opportunities for better jobs will be fewer as well.
Having an education broadens horizons and becomes priceless for intellectual stimulation alone.
Useful Financial Tips for Millennials
Getting your finances in order now sets the stage for long-term stability and success.
Here are 5 useful money tips:
- Automate Savings - Set up automatic monthly transfers from checking to savings accounts and retirement contributions. This builds savings without willpower or effort.
- Build Your Credit - Use credit cards lightly and make full on-time payments. After 6 months, request credit line increases for added available credit. This will boost your credit scores.
- Make Extra Student Loan Payments - Pay even $20 above the minimum due to directly lower principal. Target high-interest loans first when making extra payments.
- Negotiate Bills & Rates - Don't be afraid to negotiate monthly bills like cable/internet, phone plans, insurance rates, bank fees when any seem high. Even small savings add up.
- Learn to Cook - Eating out is very expensive long-term. Learn to grocery shop, meal plan, and cook - even basic meals. Pack lunch rather than buying it. Small food savings make a substantial impact.
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