5 Cash Flow Mistakes Millennials Are Making That Could Hurt Them in the Long Run
Written by
Jennifer Taylor
Edited by
Jordan Rosenfeld
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Millennials are getting older, but not necessarily wiser — at least with their money. Even those who are financially responsible aren’t necessarily making the right money moves for their future.
GOBankingRates spoke with two financial advisors to find out exactly what millennials are doing wrong. Keep reading to learn five cash flow mistakes commonly seen from this generation.
Not Contributing To a Roth IRA
Millennials who don’t contribute to a Roth IRA — or a backdoor Roth IRA — are missing out, said Filip Telibasa, certified financial planner (CFP), owner and planner at Benzina Wealth.
“The big benefit of this account type is tax-free earnings,” he said. “If you start sooner, you will have more time to compound the tax efficiency, putting you way ahead in the long run.”
For 2024, most millennials’ total contribution limit for traditional IRAs and Roth IRAs is $7,000, according to the IRS. However, those who earn above a certain income threshold must use a backdoor Roth IRA, which involves making direct contributions to a traditional IRA, before converting it to a Roth IRA.
Not Having an Emergency Fund
By now, most millennials are probably aware of the importance having three-to-six months of living expenses put aside in an emergency fund. Despite that, Telibasa said he still sees some millennials using credit cards or taking a 401(k) loan when emergencies arise.
“Ultimately, this puts you in debt — or causes you to be subject to lost earnings in the case of the 401(k) — and you end up paying more than you had to due to interest,” he said.
Focusing Too Much on Rate of Return
Getting a good rate of return is important, but it’s not the only thing that matters.
“With good investing advice being more widely available, a suitable portfolio is becoming more commoditized for the everyday investor,” said Charles Kyle Harper, certified financial planner (CFP), chartered financial consultant (ChFC), retirement income certified professional (RICP) and financial advisor at Harper Financial Planning. “However during the early career and even into mid-career, it matters much more how much you can put away than whether you get a 7% or 9% rate of return.”
Saving for Kids’ Education Instead of Retirement
Many millennials are willing to sacrifice their retirement savings for their children’s higher education, Harper said. While noble, this isn’t the best financial move.
“Stereotypically, the families that place a high emphasis on education produce the students who receive the most in scholarships and need the funding the least,” he said. “What is left can be borrowed easily and with a relatively low interest rate.”
Aggressively Paying Down Low-Interest Debt
“Many millennials locked in 2.5% mortgages and auto loans during COVID,” Harper said. “But instead of taking the extra liquidity and investing during the last handful of years — and being rewarded handsomely by the stock market — they have focused on paying down low-interest rate debt that isn’t costing them much in interest over time.”
He said millennials would be better off leveraging their low-interest debt to increase their long-term investments.
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