The 3 Top Financial Mistakes Millennials Will Come to Regret
If you're a millennial, you're still young enough to turn things around.
- Living below your means is the best way to get ahead financially.
- Today is the best time to begin investing for the future.
It's tough to keep the generations clear. Is someone born in 1981 a millennial or do they belong to Generation X? In truth, we're not positive. It all depends on who you ask. For the sake of this article, we're going with findings from Beresford Research. Beresford says millennials were born between 1981 and 1996, making them roughly 25 to 40 years of age.
Each generation has its own set of financial issues, mistakes that have haunted us. Because of the economic situation they have faced, here are three financial mistakes a millennial may come to regret.
1. Being impatient
This roadblock is certainly not limited to millennials. It's easy to go out and buy more house or car than you need when you see the people around you doing it. It's tempting to take a vacation you can't afford when everyone on Instagram is doing the same. As older millennials move into their 40s, it's natural to feel as though these luxuries have been earned. Still, there's a good reason to save for the things you want: debt.
According to an Experian study, the average millennial owes $87,448. It breaks down like this:
|Type of debt||Average owed|
Taking out a personal loan to pay for an over-the-top wedding sure to make old friends on Facebook jealous may leave you with nice photographs, but it can also leave you paying for an event years after it took place. Buying more house or car than you need not only leaves you with less money, but expensive things cost more to insure and maintain.
Going into debt for things you can live without means you're not living below your means. Realistically, living below your means is one of the surest ways to get ahead financially. Imagine this:
- You bring home $8,000 per month.
- You set up a budget that allows you to spend $6,000 each month.
- The remaining $2,000 is available to invest and save for the things you dream of doing and buying. That's $24,000 per year to invest and save for the future.
Is it possible it will take you an extra five years to move into your dream neighborhood or pay for an all-inclusive stay at a tropical resort? Yes -- and here are three reasons that's good:
- You had emergency funds available if anything went wrong while you were saving. For example, you had the funds to pay if another pandemic closed down the economy, you were hospitalized, or your car needed a new transmission.
- Postponing the purchase of things you desire meant not having to pay interest. Let's say you decided not to wait and put a $7,500 all-inclusive vacation on a credit card with a 17% APR. If you made a $182 payment on the card each month, it would take you five years and three months to pay it off in full. In addition, you would pay $3,841 in interest. So, instead of costing you $7,500, the trip ends up costing $11,341.
- You buy yourself time to decide what's important to you. Giving yourself time to invest and save also allows you more time to make big financial decisions. Maybe all your friends are buying big new houses and a few years into saving you realize that what you want to do is move to a foreign country and teach English instead. Time is your friend when it comes to big financial decisions, and saving gives you that time.
2. Taking advantage of easy credit
If you're trying to invest and save, you probably don't need the temptation of a dozen different credit cards in your wallet. How many times have you been checking out, only to hear something along these lines: "Open a credit card with us today and you'll save an extra 20%?"
There are many advantages of having a credit card, including fraud and identity theft protection and the ability to earn rewards points. However, when you have so many that it's tough to keep them straight, you know you have too many. One missed credit card payment can stay on your credit report for years and knock your credit score down.
READ MORE: Credit Card Debt: What You Can Do to Get Out
3. Not saving early or ambitiously enough for retirement
When you're 20, it's hard to imagine yourself at 40. And when you're 40, it's hard to imagine a day when you'll be retired. Yet, one day millennials will retire and depend primarily on the funds they have put away through the years.
Pensions are nearly a thing of the past, and Social Security payouts could change by the time you're old enough to collect. What that means is you'll need to be even more serious about investing for retirement than previous generations. While it may not seem fair (it's not), it's important to know what you're up against.
Life is expensive and you may not feel as though you have enough money to invest for retirement, but let's look at how much waiting to invest can cost. In this scenario, the person earns $50,000 per year and puts 6% of pre-tax earnings into a retirement account. This table shows how much a retirement account would be worth at age 67 if they began investing at different ages. For the sake of simplicity, we'll assume their income remains steady throughout their career and the retirement account earns an average annual return of 7%.
|Age When You Begin Investing||Account at Age 67|
As you can see, the earlier a person begins to invest, the better off they'll be in retirement. Those who begin later will need to invest a greater portion of their income to play catch up.
One thing that sometimes gets overlooked in a discussion about retirement savings is the peace of mind that comes with knowing you're doing the most you can for your future self. While saving for the future may feel like an unwelcome obligation, it's the best way to make sure you call the shots regarding how your eventual retirement will look.
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