10 Money Mistakes Millennials Make (And What to do About Them)
People love to stereotype millennials. According to the media and baby-boomers: we hate commitment, only eat avocado toast and will never own a house. They think millennials don’t use their money properly.
Millennial bashing is a huge problem. Instead of judging some helpful advice would be be great.
It makes sense that we have a hard time managing money when it was “impolite” to talk about. Yet now we need to know everything about it.
Even though millennials make less than other generations we need to take control of our finances. Let’s look at some ways we make mistakes and how we can fix them.
Millennial Money Mistake #1: Spending too much on food & drink.
Who doesn’t love a good meal or drink? Grabbing a drink with coworkers or an occasional date night never hurt anyone, but it can add up quickly.
A 2018 study confirms 49% of millennials spend more on dining out than they do on saving for retirement. It can be difficult to break the habit of eating out and drinking when you’re used to it. Millennials spend an average of $2,921 annually dining out. That averages out to $8 a day.
Let’s say you cut that number to $6 a day. In one year you save $731. If you invested that in a fund that have a 6% return (being very conservative with this number) over 10 years you would have almost $9,000 saved up.
Buying lunch or a coffee here or there seems harmless, but it can add up fast. On the other hand, saving can add up fast too.
#2: Spending too much on rent.
If you live in a city, home ownership may seem like an impossible dream. The reality is millennials have to spend more than Gen-X or Baby Boomers did.
Between the ages of 22 and 30 the average millennial spends a ming-boggling $92,600 on rent.
Even more alarming is the fact that it is getting worse for younger millennials. A millennial who turns 40 in 2017 would pay $85,800 for rent from 22-30, but a millennial who turns 30 the same year would spend $93,400. As time goes on, it is getting harder and harder for millennials to pursue home ownership.
The general rule is to not spend more than 30% of your total income on mortgage or rent, but how do you maximize your savings and prepare for home ownership if that is a priority?
Live with your parents.
There’s no shame in moving back in with the folks. If they’re nice enough to not charge you rent, you can aggressively pay off loans or save for a home. The social dynamics might be interesting at times, but moving back in with your parents can set you up for big financial success in the future.
You might not love having dirty dishes in the sink, but having roommates is an easy way to cut back on your living expenses. You’ll save money on rent, gas, electric and internet as well. Even if it’s a short term sacrifice to pay off your debts or save up for a house, having roommates is a great way for anyone to reduce their cost of living.
#3: Spending too much on cars.
Even though millennials spend less on their car than previous generations, car ownership is still incredibly expensive.
As of 2018, the U.S. Bureau of Labor Statistics says the average costs to own and operate a vehicle is $9,576 per year. Let’s break down this number more:
Purchase of a vehicle: $4,054
Gas and oil: $1,968
Other expenses: $3,554
This adds up over time. If you feel like you are spending too much on your car, there are a couple strategies to get your cost down.
Buy used and a couple years old
A new car uses 30% of its value in the first year of use. Give it a couple years and it will depreciate even more. Why buy new when you can buy slightly used for half price. You sacrifice a little pride buying used, but you could save upwards of $100,000 in the course of your lifetime by purchasing used cars.
#4: Not doing your taxes right.
A survey of 1,600 people conducted by USA today shows that 80% of taxpayers age 18-34 are afraid of making a mistake on their taxes.
It’s not hard to understand why millennials fear taxes. They are complex, expensive and high school teaches calculus instead of basic finance. The IRS estimates that the average person spends about 13 hours preparing a tax return.
If that’s the case, let’s do a little bit of math.
Average cost of tax preparation = $176
Median daily wage for US workers = $171.40
If you make an average wage, it would be cheaper and more time efficient for you to pay for tax preparation. Everyone’s financial situation is different, but since there is so much fear and time consumed because of taxes, maybe we are all better off just paying someone to do them.
If you have trouble doing your taxes, an app might help. Credit Karma has a great free tax filing product.
Millennial Money Mistake #5: Making decisions based on emotions.
One of the best things about millennials is the desire for honesty, transparency and trust. 48% of millennials are more likely to buy from a brand if they know the people behind it.
What does this mean for millennials in regards to finances? It means that sometimes people jump into investment platforms or purchases that align with their values, but do not necessarily add the best value.
One example is Swell Investing. The app targets socially responsible investors with funds targeting specific social issues. While this a great approach to green investing, all of these funds except 1 underperformed the S&P 500.
#6: Not being financially literate.
Financial literacy is defined as “The possession of the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources.”
In a recent study of 5,500 millennials, research showed that only 24% posses an adequate level of financial literacy. This plus the fact that 80% of the same group has one or more forms of long term debt is alarming.
Financial literacy is vague, but it means you are able to make good decisions and understand financial issues everyone deals with. Let’s break those down by category:
Budgeting and setting financial goals
This one is pretty straightforward, but keeping a budget is hard (see Mistake #8). Knowing how to budget or what budget app to use, and having a serious conversation with yourself about what your financial goals are is crucial to being able to make smart financial choices.
Paying bills and saving money
Staying on top of rent, electricity, internet, credit cards and subscription services can be a lot to juggle. Having an awareness of where your money is going is crucial to long-term financial health.
Basics of loans (personal, debt, mortgages, etc)
Student loans are required for many who go to college now. As of June 2018, total US student debt reached a whopping $1.5 trillion. This is only one kind of debt, but many millennials have to deal with it.
Mortgages are another complicated form of debt. Again, no education is given on this topic in school, and millennials are somehow supposed to know what to do when it comes time to make their first house purchase.
Credit cards and credit scores
If you don’t know where to start with credit cards, it might be better not to start. Make sure you are able to pay your bills and control your spending with your bank account before jumping into the world of credit cards.
Always pay the full balance on your credit card. Don’t treat it differently than a debit card. Going into debt can seriously damage your financial future.
How investing works, 401ks, the stock market, etc.
Investing is a complicated process that takes a lot of time and research to understand. It’s too much to fully cover in this post, but here are two pretty commonly agreed upon points.
S&P 500 is a safe bet
Since it’s inception in 1926 the S&P 500 has had average returns of 9.8%. Warren Buffett said on CNBC that $10,000 invested in an S&P 500 index fund back in 1942 would be worth $51 million today.
The returns of the S&P 500 vary year to year, but the longer you buy and hold, the more likely you are to see positive returns.
Max out your 401(k) first
Very few millennials are adequately saving for retirement. If you can, you should definitely max out your retirement fund, especially if you are getting closer to retirement age. The 2019 limit on 401(k) contributions is $19,000.
Check and see if your employer offers 401(k) matching. Matching means that for every dollar you save, your employer will save some money as well. This is literally free money and you definitely do not want to pass this up.
#7: Not setting up an emergency fund.
A commonly agreed upon rule is to have 6 months of expenses saved up in case of an emergency. Accidents inevitably happen, and if possible you can save yourself a lot of stress if you have money saved up.
Even so, the average American household savings account balance is less than $5,000. One accident or medical emergency could totally wipe out this fund.
Automate your savings
For millennials, saving money can be difficult and time consuming, especially if you have to transfer money from account to account. For a long time the thought was to save 20% of your income. This might seem like a pipe dream for you currently, but something is better than nothing.
Don’t despair if you can’t save this much, make it a game. Start yourself where you are comfortable, even if that’s 1%. From there, start evaluating your spending and look for things you can cut out. Trimming of even a couple of cents every few days over time can have a massive impact on your ability to save.
#8: Failing to make a budget.
In a recent survey of young adults age 16 to 25, 76% said they believe they will have a better financial future than their parents. 51% of those interviewed said they have some sort of debt to pay. If given $1000, only 3% of those interviewed would use it to pay off their debt.
This same study showed that this age group is more likely to talk to their parents about drugs than money. This is a huge problem that needs to be dealt with as we raise new generations.
Everyone would benefit from automating their savings and budgeting process. Mint is a great free resource to kick start your budget.
As of 2017, 16% of millennials plan to not have any health insurance. 26% said they can afford routine healthcare costs with difficulty.
66% of those say a premium of $200 or more a month is unaffordable. Compare this to the average cost of $440 per month for an individual healthcare plan and you will start to see where the problem is.
Health insurance is a terrible price to pay, but the price of being uninsured in an accident can be much, much higher. If you are struggling to afford health insurance, here are a few options to consider.
#10: Taking on too much debt.
For many of those who went to college, taking on debt was an unavoidable reality. Millennials have amassed a whopping $1 trillion in debt, primarily because of student loans.
A lot of people live with debt, but it sticks with you and can have huge negative impacts on you years down the road. Recently CNBC found that 1 in 5 millennials expect to die never having paid off their debt.
If you are struggling to get out of debt, don’t lose heart. There is a way out. See how this family paid off $100,000 of debt in 26 months.
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