Millennials are often criticized for their spending habits and frivolous lifestyles. There are a number of explanations for this kind of behavior. The Millennial generation saw their parents go through the dot-com bubble, and the housing crisis, which may have contributed to this attitude: “Enjoy the money now, because you never know what could happen."
The average Millennial who graduates college today has $37,000 in student loan debt. At the same time, wage growth has been slow during the current economic recovery. Despite these challenges, Millennials can still avoid some costly financial mistakes and look forward to a brighter financial future. (For more, see: Top 5 Most Common Personal Finance Goals for Millennials.)
Here are five common financial mistakes Millennials make:
1. Waiting to Invest
This could be the biggest mistake anyone could make when it comes to investing. Time is the biggest advantage Millennials have to secure a strong financial future. The power of compounding, coupled with decades of investing, can achieve miraculous things. If you want to be wealthy later in life, the easiest way to get there is through investing, patience, automatic contributions and discipline to your strategy.
2. Upgrading Lifestyle Before Increasing Savings
We’ve all been there. You receive birthday money, an annual bonus or raise, and you go out and spend it like it falls from trees. There’s certainly nothing wrong with enjoying yourself, especially in celebration, but a good habit to get into is put aside a partial amount in savings or investments. Before you go out and enjoy yourself, or make a big purchase, set aside a solid amount.
If you’re getting an annual 3% pay raise, consider increasing your 401(k) contributions the next year by 1% or 2%. If you receive a lump sum bonus, take as much as 10% to help pay down student debt, build an emergency fund or invest. The habits you form now will go a long way and you won’t regret forming this one early.
3. Not Taking Risks
Millennials can afford to take risk with investments. Most have 30 or 40 years until they will need to withdraw from their retirement accounts. Again, time gives investors a distinct advantage. Being risk averse in retirement accounts could cost you purchasing power down the road. What $100 buys today, will not go nearly as far 30 years from now. It’s important to outpace inflation, which averages 2%-3% historically, by taking risks with your investments. (For related reading, see: Money Habits of the Millennials.)
4. Neglecting Retirement Savings for Student Loans
Paying off student loans should be the top priority for most people due to high interest rates. However, this does not mean you should ignore other financial goals. You can’t recover lost years of retirement contributions. Not to mention, if your company has a 401(k) employer match, you’d be losing free money by not participating. Even if you contribute the minimum matching percentage to a 401(k), and focus your remaining cash flow on paying off student debt, you’re still getting a head start on building long-term wealth.
5. Lack of Planning
A favorite quote of mine is from the French writer Antoine de Saint Exupery. He said, “A goal without a plan is just a wish.” His words ring true with just about anything in life. Whether it’s personal, professional or financial. If you want to achieve something, there needs to be a plan in place to do so. A clearly outlined plan of attack definitely increases the chances of achieving financial goals. Yes, it takes time to understand where you are at financially now and where you want to be financially later, but the time is well spent.
People who have a clear understanding of their monthly budget/expenses, monthly savings rate, debt reduction strategy, and investment strategy are more likely to achieve their financial goals. The satisfaction of reaching a milestone in net worth or paying off debt is addicting. It all starts with a plan. The key is recognizing the mistake and to learn from it.
Are you making any of these mistakes? If so, what strategies have you used to take control? (For more from this author, see: How Much You Should Contribute to Your 401(k).)