I’m a Financial Advisor: 10 Costliest Mistakes Middle-Class Millennials Make
Written by
Martin Dasko
Edited by
Molly Sullivan
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There can be a lot of confusing information regarding money management and deciding how to set up your financial situation. You’ll likely make some mistakes as a young person when trying to get your finances in order. This is why we compiled a list of financial challenges common to middle-class millennials.
What are the mistakes that cost middle-class millennials the most? We will break down 10 common money maneuvers you want to avoid.
1. Not Setting Up an Emergency Fund
“One of the costliest mistakes middle-class millennials make is failing to prioritize the establishment of an emergency fund,” said Taylor Kovar, CFP CEO and founder at 11 Financial. “Without a financial safety net, unexpected expenses such as medical emergencies, car repairs, or job loss can lead to significant financial strain, forcing individuals to rely on high-interest debt or liquidate investments prematurely.”
It’s crucial that you set aside the funds for a rainy day because you don’t want to be forced to rely on credit cards to handle emergencies that may pop up. You want to be confident in knowing you’ll be able to handle any unexpected expenses because you never know what life will throw at you.
2. Lifestyle Creep
“Millennials let their spending increase commensurate with their salary,” said Robert R. Johnson, PhD, CFA, CAIA, professor of finance, Heider College of Business, Creighton University. “For instance, people move into a bigger apartment or buy a more expensive car or home to reward themselves for receiving a raise. They can’t improve their financial condition because they spend everything they make.”
As your income increases, it’s tempting to reward yourself instantly since you worked hard for this. However, this common mistake will prevent you from investing in your future since you don’t embrace delayed gratification. While holding off to treat yourself can be a struggle, it’s worth it in the long run.
Sometimes, allocating additional income to your retirement accounts makes more sense so that you can be financially secure when you retire.
3. Not Investing In Retirement Right Away
“Delaying contributions to retirement accounts such as 401(k)s or IRAs can significantly diminish the power of compound interest over time, making it more challenging to accumulate sufficient retirement savings in the long run,” Kovar said.
Many millennials will ignore the significance of prioritizing planning for the future early on in their careers. The sooner you start investing in your golden years, the sooner you have the power of compound interest on your side. You also don’t want to miss out on any matches from your employer as this could help you build a bigger nest egg for retirement.
Johnson added:
“At a minimum, one should contribute the amount needed to earn the maximum employer match. One of the most important financial decisions anyone makes in their life is the decision to participate in an employer-sponsored retirement plan. Perhaps the worst financial mistake anyone can make is turning down free money.”
4. Overspending on Nonessentials
“While it’s essential to enjoy life, failing to establish a budget and differentiate between needs and wants can lead to excessive spending habits that hinder financial progress and long-term wealth accumulation,” Kovar said.
Middle-class millennials can easily spend too much on luxury items that are out of their price range. You want to ensure that your spending matches your income because you don’t want to live an unrealistic lifestyle that you can’t afford yet.
5. Buying a Home They Can’t Afford
“Many make the mistake of buying the most expensive house they can afford and become house-poor,” Johnson said. “Overextending and buying a large home is a losing strategy because mortgage payments crowd out other investing activities.”
While you may get preapproved for a certain mortgage, it doesn’t mean you want to choose the most expensive option. Buying a home you can’t afford is a costly mistake because you’ll spend most of your income on living expenses. The costs can add up quickly when you factor in mortgage payments, taxes and basic maintenance expenses.
6. Only Investing In Their Primary Residence
“Many people hear stories about an individual buying a house for $50,000 and selling it 30 years later for $1 million,” Johnson said. “That sounds like a fantastic return, but once you consider routine maintenance, property taxes, and other attendant costs, residential real estate has not been a very efficient way to build wealth.”
Only investing in your home is costly because you’re missing out on other assets and opportunities. When you spend most of your income on living expenses, you have less money to allocate toward retirement and other options that may provide greater returns. While you need a place to live, you don’t want your home to be your only investment.
7. Acquiring Debt Without a Plan
“Middle-class millennials often fall into the trap of accumulating high-interest debt, such as credit card debt or personal loans, without a clear plan for repayment,” according to Kovar. “High-interest debt can quickly spiral out of control, resulting in significant interest payments and prolonged financial stress.”
Acquiring debt without a clear strategy for paying it off will lead to financial struggles. With the current interest rates, you could spend far more on interest than you thought you would. This is why it’s critical that you think twice before applying for a loan when buying a car or when adding expenses to your credit card.
8. Not Taking Financial Planning Seriously
“Many middle-class millennials overlook the importance of financial planning and education, assuming that they can figure it out as they go,” Kovar said. “Without a solid understanding of basic financial principles such as budgeting, saving, investing, and debt management, individuals may make costly mistakes that compromise their financial well-being.”
You’ll want to take your financial planning seriously from the very beginning so that your money management improves as your income increases. If you don’t take financial planning seriously, you may not have the money that you need to enjoy yourself in retirement.
9. Not Being Aggressive Enough With Asset Allocation
“Counterintuitively, the biggest mistake many people make in investing is not taking enough risk,” according to Johnson. “Unfortunately, many people are overly conservative with their asset allocation, particularly in their retirement accounts.”
It’s important that you work with a financial advisor to ensure that you’re investing your money into assets that will grow over time so that your money isn’t sitting in an account that barely provides any returns.
Johnson shared some insights on investing for middle-class millennials:
“The surest way to build true long-term wealth for retirement is to invest in the stock market. According to data compiled by Duff & Phelps, since 1926 the average annual return on a large capitalization stock index (think S&P 500) is 10.1%. If these historical average returns hold in the future, an investor would double their money in slightly over seven years and have ten times their original investment in 23 years.”
10. Only Focusing On Saving
“Achieving true financial security and wealth is done by saving and investing,” Johnson said. “Too often, people rationalize that they will begin saving when they make more money, only to realize that it is easy to simply let spending increase commensurate with salary.”
It’s also important that people embrace investing and not simply saving. The money you save needs to be invested in assets that will grow over time. You want to ensure that your savings can at least keep up with inflation.
Closing Thoughts
When you first learn about money management, it’s easy to get overwhelmed because there’s so much information, and you may not always know how to proceed. The good news is that these costly financial mistakes can be avoided with a little bit of planning. You don’t want to hurt your financial future because you weren’t looking out for these issues.
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