Millennials, who are becoming a more prominent segment of the American workforce, must pay special attention to their finances. Many individuals in this generation are already on their way to financial security, but some millennials with great educations and solid careers are still making significant financial mistakes. Some have stumbled in more than one way, which could create financial debt that takes years, if not decades, to escape.
If you’re a millennial, you can still learn to avoid the most common mistakes made by your generation and take steps to correct any errors that you may have already made. Read on for some of the most common financial mistakes made by millennials.
1. Postponing savings
Often, when we find ourselves with only a little bit of money left over from our paychecks after covering bills, we can fall into the trap of saying that we will start to save “soon.” However, as we age, expenses tend to incur, so there is no perfect time to start saving.
Realistically, getting ahead financially means living beneath, not within, your means. This way, we can save for the future and make sure that we have a good cushion for retirement. Millennials, in particular, should think about using their raises, promotions, and bonuses to boost their savings rather than their lifestyle.
2. Overusing credit
Retailers have become very good at luring people into opening store credit cards. They target customers in the checkout line, telling them they can save significantly on their initial purchase.
Millennials, some of whom may be inexperienced in dealing with credit, may think they are making a smart financial decision when they open several lines of credit. After all, credit cards are a great way to earn various rewards with everyday purchases, and they often come with fraud and identity theft protection.
At the same time, credit cards are only a good decision when you pay them off each month. Rather than opening several accounts, you should focus on finding one or two cards to use responsibly.
3. Overborrowing student loans
People take out student loans for a variety of reasons, but it is important to ask yourself whether it makes financial sense for you. If attending a prestigious university or getting a specific degree will not boost your earnings potential enough to justify the expense, then you should investigate other options.
Many millennials have mountains of student loan debt, particularly those who are pursuing post-graduate education. Before starting a post-grad program, ask yourself, “Will the new degree increase my earnings enough to justify the monthly payments of these loans?”
4. Saving cash
According to a recent Bankrate survey, more than one-third of millennials save money they don’t need for at least 10 years as cash, rather than invest it. While investing may seem daunting, due to its frequent ups and downs, saving money as cash often leads to losing purchasing power since the rate of return on savings accounts is not even close to the rate of inflation.
Those who will not need their money for a considerable amount of time should investigate investing solutions with the potential to outpace inflation, which is possible even with low-risk tolerance. Meanwhile, those who will need their money within five years can still use certificates of deposit or money market funds to help outpace inflation in the short term.
5. Foregoing a “rainy day” fund
When it comes to financial goals, some millennials may prioritize buying a house, for example, rather than creating a rainy day fund. However, a financial cushion is important to maintain, as, without it, you may end up relying on credit cards in an emergency, which can in turn lead to significant debt.
The first step in building a solid financial foundation is to create a rainy day fund, which should account for three to six months’ worth of monthly living expenses. If you pull from this account, you should make sure to replenish it as quickly as possible.
You may also want to consider creating both an emergency and a rainy day fund. The emergency fund covers serious issues like illness, injury, or job loss, while the rainy day fund is meant for smaller issues like car problems or home repair.
6. Avoiding finding professional help with finances
Millennials, who may not have well-established careers and, therefore, significant cash flow, may cite cost as a reason to avoid hiring a professional to help them sort out their finances. While some financial professionals can charge a lot, there are still many affordable services out there. Moreover, their benefits to you outweigh the costs—tax professionals and asset managers can help you maximize your earnings, making hiring them worthwhile.
Tax and legal issues can quickly become complicated, but these professionals understand how to help you avoid common pitfalls while getting the most out of your time and investments. Many financial planners will even answer financial questions by charging an hourly rate for on-demand assistance.