According to the Huffington Post, millennials are quite susceptible to making a lot of money or financial mistakes call it naivete, call it ignorance, whatever the case may be these money mistakes are costing millennials a lot of money. While mistakes are certainly part of life and prove to be vital learning curves, millennials need to learn quickly in order to save enough money to meet their financial goals.
Sure, it can be quite tempting to have the same money habits as the rest of your friends and “live your best life” by buying the newest iPhones and even splurging on mimosas and avocado toast at Sunday brunch. However, with discipline comes its rewards.
Let’s take a look at some of the most common investing and saving mistakes that many millennials make.
1. Not taking advantage of employer’s contribution plan
Many employers offer employee contribution plans as part of their retirement benefits, in which the employer fully or partially matches the employee’s contribution to their retirement plan. Unfortunately, not a lot of millennials are taking advantage of this.
Think of your employer’s contribution as free money. A lot of millennials don’t take advantage of this for some reasons such as: i) They are ignorant about the fact that this exists ii) It’s too complicated to understand and they would rather not bother with it iii) They need the money too much to be able to save anything (therefore there is nothing for the employer to match)
Whatever the case might be, every millennial should seriously consider taking advantage of their employee’s contribution plans.
A quick preview of how this works: Let’s assume you earn $70,000 annually. Your employer then offers a 7% annual match to your earnings, which is $4,900 ($70,000 * 0.07 = $4,900). However, you only save about 5% of your salary, which means that your employer matches this by contributing 5% (instead of a maximum of 7% offered). This means you’re missing out on $1,400 of FREE cash offered by your employer ($70,000 * 0.05 = $3,500 | $4,900 – $3,500 = $1,400 ). If you take account the compounding effect of this over the 40 years of your career, now that’s a lot of free money.
2. Not knowing which purchases are tax-exempt
Depending on your income, investing in a Roth IRA (In Canada, this is a Tax Free Savings Account or TFSA) or Individual Retirement Account can be advantageous. However, it is very important to know the difference between tehe tax-deferred and tax-exempt accounts before making a decision in which savings account to invest in because it can make a huge difference to your financial health. According to the IRA, employee benefit associations or funds, for example, are tax-exempt, and you shouldn’t pay taxes on money that you put into these two accounts. In short, don’t pay for things that you don’t have to, right?
How your investments are taxed can have a huge impact on your long-term goals. Take for example Roth IRA or Roth 401(k), both of which are tax-free, compared to a taxable account such as brokerage.Say you make $5,000 deposits to two Roth IRAs that earn a 7% return. The interest for this year would be $350 ($5,000 * 0.07 = $350). You get the full amount of $5,350. If you choose to invest through a brokerage, however, you would need to pay a premium. The premium price usually includes fees to maintain a brokerage account, subscription to research that helps with investment strategy, and fees to access trading platforms. Premium, as the word depicts, isn’t cheap.
3. Not having an emergency fund
An emergency fund is a bedrock of any solid financial plan and is having one is one of the most important decisions you will make. It’s not always a glamorous life when you’re working. You need to have emergency funds at all times or you might find yourself buried in debt if you keep applying for loans or using your credit card (which you are unable to pay off at the end of the month) when you know, life happens.
Need more motivation to actually build an emergency fund or not sure how to get started? Take a look at this article:
4. Not investing at all
The biggest problem that many millennials face is their student loan debt. FXCM stated that about 71% of fresh graduates left college with an average debt of more than $35,000, which is far higher than the 64% of millennials who graduated with loans about a decade ago.
Despite the costs associated with student loans, however, millennials should look to invest whenever they can. There are plenty of low-cost investment channels today, one of which is micro investing, which transforms a person’s loose change into investment capital.
Based on historical data, if you start investing about $100 per month over the next 40 years, you will have an estimated balance of $600,000 in your portfolio by the time you retire. That’s a lot of money for retirement, which can be done pretty pain-free.
5. Only “investing” in depreciating assets
Millennial CFO revealed 0ne of the biggest mistakes that millennials make is purchasing very expensive or big-ticket items like cars immediately after graduating. Yes, we would all like to show off that we’ve “finally made it” by posting pictures of our new cars and cool gadgets on Instagram and Facebook; leasing a car that we cannot afford but the reality is this can be a financially catastrophic decision in the long-term.
If you’re buried in debt due to personal loans, student loans, and credit cards, most likely buying a car should not be the first thing on your to-do (or to-buy) list. Loans usually have interest rates ranging from 5 – 15%, and you will need to take care of this before you can even start making saving for your retirement and future financial milestones.
Being buried in debt can be pretty scary so it’s important to manage your finances at all times. If you need help, there’s no shame in asking for assistance from expert financial advisers who can help manage your expenses efficiently.
What are some money mistakes you’ve made in the past?