The 12 Biggest Mistakes Millennials Make with Money
Millennials aren’t the most financially savvy bunch. Most of us weren’t taught the basics of personal finance and then put in a position where debt became culturally acceptable. Because we started on the wrong foot, we never built up the courage to learn about how to manage our finances effectively. So, here we are today, as a generation, lost, confused, and in a tight financial spot. But, this doesn’t have to be a permanent state of being. We can learn from our mistakes and make smart changes regardless of our starting point. So, what are the 12 biggest millennials make with money? Let’s dive in!
- Not having a budget
Despite all the easily accessible apps for budgeting and tracking expenses, millennials are still having trouble getting a budget set up and sticking to it. We are spending more on Sunday brunches and Amazon than we ever care to admit.
The idea behind having a budget is to help you save money for any goals you have in your life. Most advisors or budgeting apps suggest saving 10-20 percent of your monthly income. According to the 2018 Census Bureau, millennials earn, on average, $47,034 per year. Let’s keep the numbers simple. If you saved 20% of this income because of your budget, you would have saved $9,406.80 by the end of the year. That’s nearly $10,000!
- Sticking with a bank that’s giving you no interest on your money
It feels as though switching banks takes all the energy in the world. So, we stick with the one our parents set up for us when we were teenagers. Well, it turns out these banks are not only so old fashioned (only open from 9-12 on a Saturday?!) but also typically pay you less than a penny on your dollar!
Fortunately, there are a lot of banks that are a little bit more innovative. You need to have a bank that’s giving you some interest on your checking and savings accounts. Let’s run some numbers: the average American has $8,863 in a savings account (we’ll talk about why this is scary in a second). Let’s keep this number simple and say you earn about 2% (we’d suggest you pick a bank giving you at least 1.5% or more) on that savings account if you switched banks. Over a year, this means you would earn roughly $180 in interest. In other words, you made $180 of “free” money!
- Saving for the worst-case scenario
Only 44% of millennials have emergency funds. That means for most of us, if an unexpected expense of more than $1,000 came up, it would be paid for on a credit card and racking up a balance until we can scrape up the extra cash to pay it off. Having an emergency fund should be a high priority for you if it’s not already. The rule of thumb is to have six months of savings is essential to keep you out of trouble.
Let’s run the numbers: On average, an emergency expense can run a bit higher than to the $1,000 quoted earlier. A standard single emergency expense (from medical bills to your car breaking down) can cost $2,500. You don’t have an emergency fund, so you put that bad boy right on a credit card. The average interest rate on a credit card is 19.02%. Let’s say you keep that balance for a year before paying it off. That means you will have paid on average $475.50 in interest by the end of the year. Give your future self some relief and save for an emergency!
- Understanding your credit score and the impact it has
Ah yes, the elusive credit score. Who cares about that anyway? Well, just every credit card company, rental agency, car loan provider, and every mortgage lender, to name a few. I’ve met more than a few millennials with poor credit scores because they were not making payments on time. According to CNBC, millennials have an average credit score of 668. That is not so bad compared to our generational peers, but if we brought this number up, we would see significant savings.
Here’s a scenario from Forbes Magazine you can find in more detail here.
Here’s the gist: A 130 point difference in credit score caused a 0.50% difference in the interest rate of a home loan. The article reports a payment difference of $89 a month, or $1,068 annually. So, by having a better credit score, they saved over $1000 in a year. Over the life of a 30-year loan, those numbers are looking pretty impressive. You can also save on rental rates, car loan rates, credit card interest rates, and even insurance premiums! All of which can add up fast!
- Getting out of debt
Those interest payments, as we’ve seen, can add up, and fast! Business Insider reports the average millennial has $29,800 in debt, the bulk of which is credit card debt followed by student loan debt.
Since it’s a relatively even split of which is more popular, let’s say someone has $14,900 in credit card debt and $14,900 in student loan debt. The average interest rate for credit cards is 19.02%, which in our example will equate to racking up $2,833.98 in interest annually. And with the average interest rate for student loans sitting at about 10%, that will be $1,490 in interest paid by the borrower.
So, in one year alone, this big kahuna of debt will accrue $4,323.98 in interest payments in a single year! Can you imagine how nice it would be to have that money back in your bank account?
- Finding and using the right credit card
Credit comes in all shapes and sizes, and there are options for every purpose you can think up. Let’s focus on the positive this round.
Discretionary income for a millennial, on average, is 11% of their total income. As mentioned before, the average income for Millennials is $47,034. That means total discretionary income is $5,173.74. So, if someone placed discretionary transactions on a credit card (paying the full balance without accruing interest of course) and that card earned you 2% cashback, you earned $103.47 of “free” money by the end of the year.
- Not having Life and Disability insurance
CNBC quotes that only 10% of millennials have the proper amount of life insurance. It can seem like an additional expense but can make a massive difference to your loved ones in the event you pass away. As more millennials are getting married and having children, it’s time to step up and be adequately insured! It’s sad to think about, but the average cost of a traditional funeral service is $15,000. That’s a tough bill to pay without even considering the loss of income and benefits a spouse provides. The total expense is much, much higher. Most life insurance providers suggest that your policy’s death benefit should equal 10-15 times your total income. So, assuming the average income quoted prior, this would range from approximately $470,000 to $705,000 per individual.
Although planning for death is critical for a financial plan, there is something potentially more frightening to prepare for. Did you know that the Social Security Administration estimates that 1 in 4 workers over the age of 20 will experience a disability before retirement? The average long-term disability claim lasts 34.6 months. If you earned $47,034 a year, that’s a whopping $135,614 of income that would have been lost. To be covered adequately, you should have a short and long term policy that covers 60-80% of your gross income. So, $108,491 of that $135,614 of lost income could be covered by insurance.
So, for some rough numbers, being properly insured could protect you in the event of disability or loss of a loved one for $108,491-$705,000 or even more if your income is higher!
- Knowing how to keep your data and identity safe
It’s so easy these days to sign up for all these fun websites and services, yet every time we do, our data is at risk. Identity theft is no joke and is a risk and possible expense we typically don’t think about, however, it is becoming more prevalent every time a major company has a breach.
The average expense for identity theft includes costs like legal fees and overdraft fees and totals $1,343. I don’t know about you, but I’d rather spend that money on travel and take some extra care to ensure my information is as safe as possible.
- Taking advantage of your employer’s retirement accounts
There are many people out there who fail to contribute to their company’s retirement plan (i.e 401K, Simple IRA, etc.). It is a real tragedy when we not only put off saving for retirement, but we miss out on an employer match (yet another opportunity for “free” money).
Investopedia states the most common match is $0.50 per dollar up to 6% of the employee’s pay. Again, assuming you make $47,034 per year, this means you’re missing out on putting $4,233.06 in your retirement account per year, $1,396.91 of which is money your employer is PAYING you to invest in retirement. That’s significant even if you aren’t accounting for all the remarkable benefits of investing in your retirement and letting your money grow over time.
- Not planning for your legacy
As a generation (whether or not we are willing to admit it), we’re hitting the stage in our life where we have spouses, kids, and pets- things and people that depend on us in one way or another. We need to make sure they are thought of and cared for if something happens to us. Having a well-drafted Living Will, Health Care Proxy, and Durable Power of Attorney can be essential is tragedy strikes. These documents provide direction for people if you become critically ill or impaired. According to the National Bureau of Economic Research, the average out-of-pocket cost for end-of-life care is $11,618. And if you were staying at a hospital during the last month of your life, that bill can be in excess of $32,000!
If you have these documents in place, you can provide some direction for your loved ones who will have to make tough health and financial decisions on your behalf. It can save you lots of money and make the lives of those you love far improved! And that’s all without talking about the fact that a solid estate plan can help you provide for those you love, or charities you’re passionate about, long after you’re gone- truly the best part of estate planning.
- Knowing the basics of investing
Investing can be done at any age, regardless of your income, but only 43% of Millennials are currently investing for retirement or better yet…financial independence! But what is even more alarming is that 3 out of 10 millennials state that cash is their long term investment vehicle. Compound interest can be your friend when it comes to investing. For instance, if you invest $5000 at the age of 30 and that money earned 5% interest until you are 65, you would end up with only $27,580.07.
Here’s where it gets better…if you invest the same $5,000 but it earned 10% compounding interest until you were 65, you would have amassed $140,512.18!
If you invested the $5,000 when you were 30 but earned 10% compounding interest until you were 75, you would have $364,452.41
Here’s the best part: If you invest $5,000 at age 30, depositing $5,000 at the same time every year for 45 years while earning 10% compounding interest, you would have amassed a whopping $3,958,976.60! In short, millennials are missing out on one of the best tools to grow their money: time!
- Not striving for financial independence
Financial Independence is the ability to pay all of one’s living expenses for the rest of their lives without ever having to work or depend on someone. But according to a study conducted by Charles Schwab, 62% of millennials live paycheck to paycheck and lack the confidence of being able to retire, let alone become financially independent.
How on earth do we become financially independent when we are stuck at our day jobs and live paycheck to paycheck?
Well, the answer may be in the content above. The idea is that small, simple changes to your money can have a massive (and cumulative!) impact on your life. For some context, if you totaled up all of the savings we outlined above from all these mistakes, we are looking at a sum of $18,297.66 in ONE year or many millions of dollars if those habits are changed for a lifetime.
Curious about how to save millions of dollars over the course of your life? After all this math, investing some energy in your finances seems like the best investment you could possibly make. At Millennial Wealth Management, we have a completely online course to help you overcome each of these mistakes and help you build the essential financial foundation for wealth in the long term. Let’s break the habit of feeling “broke” and living paycheck to paycheck. It’s not a matter of how much you make or how much you have saved so far. It’s a matter of the changes you make today that last you a lifetime.
Join us for a free 1-hour webinar to learn more about how to tackle the first item on this list (and perhaps the most influential one): your budget. Sign up for our next session here.
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