Millennials weren’t introduced to “adulting” in an ideal situation, as many came of working age during the Great Recession of 2008. But bad timing on the economy’s part isn’t the only misfortune or pitfall this generation has suffered.
Let’s look at eight money traps holding millennials back from financial success.
Constant Competition — Even With Themselves
Millennials tend to be trapped by their ambitions to earn what Kelly Palmer, CFA, the founder and chief wealth officer of The Wealthy Parent LLC, calls “the shiniest participation trophy”.
“We were told for decades we are special and when it comes to our wealth, or lack thereof, we want that to appear true,” Palmer said. “Trapped by the competing demands of child care, booming careers, aging parents, rising rates and a continued message that we should ‘just do it all,’ millennials are feeling the pain.”
Rising Child Care Costs
The struggle is especially real for millennial parents, who have not only themselves to look after, but also their children. Often parents are pitted between two extremes: working and paying to have someone else help with their kids, or not working, in order to care for their kids, and missing out on income and a steady career.
“Child care is expensive but so is sitting out of the workforce,” Palmer said. “What should be a thoughtful decision driven by your own goals is instead turned into a financial argument that can so often result in the wrong answer for everyone. Sometimes deciding to stay at home with a child is the right financial decision because in the long run that parent’s mental health is improved and they can reenter the workforce refreshed from years of millennial overachievement.”
Not Using Credit Cards Appropriately
Every generation should use credit cards responsibly, but millennials may have missed the memo — or perhaps they just can’t get by without overusing credit cards. According to a recent study by Quicken Inc, about 53% of millennials said they were more reliant on credit cards this summer than ever before. This is a money trap that is hard to wriggle out of, but you can do it over time.
“Make sure to pay off your credit cards in full each month so that you aren’t carrying a balance whenever possible,” said Kendall Meade, CFP at SoFi. “Don’t use credit cards to purchase anything that you would otherwise be unable to afford. Credit cards can have very high interest rates and sometimes, if you are just making minimum payments, it can take a very long time to pay off this debt, potentially costing you a significant amount of interest. Make sure you pay attention to the interest rate (this can be found on your statement). Many people do not realize how high their interest rates are.”
Not Paying Off Consumer Debt
Another money trap ensnaring millennials that revolves around credit cards is the failure to pay off consumer debt. This is largely credit card debt and it tends to carry incredibly high interest rates.
“As of Q2 2023, credit card balances increased by $45 billion to reach a high of $1.03 trillion,” said Meade. “While higher interest rates are great for high-yield savings accounts, they have also caused debts such as [those created by] credit cards to get even more expensive. According to Federal Reserve data, millennials are carrying the largest amount of consumer credit, at $2 trillion (representing about 43% of total consumer credit).”
Relying on Social Media for Financial Planning
Over the past 20 or so years, social media has grown from a virtual hangout spot to check into once a day or so, to a place of perpetual engagement. Millennials are just as stuck in the social media hamster wheel as younger generations, and they may be over-reliant on these platforms not only for social stimulation, but also for financial guidance and planning.
“One challenge for this generation and their long-term financial futures is that about 20% of them turn to social media as a trusted source of information for retirement planning, according to research,” said Douglas Ornstein, CFA, senior manager, Integrated Solutions, TIAA Wealth Management at TIAA.
Social media does have some savvy and helpful influencers, and it’s good that millennials are finding inspiration to take control of their personal finance lives via platforms like TikTok, but you can’t put all your faith in these social spaces. It’s a money trap.
“There are more proven ways to succeed,” said Ornstein. “Talk to a financial consultant or advisor, review your budget and craft a plan that’s tailored for your short- and long-term financial goals.”
Student Loan Debt and Lack of Financial Literacy
Millennials are way in over their heads with student loan debt that they may not have been adequately prepped to handle.
“Now, 15 million millennials have student loan debt, which is more than any other generation,” said Zachary Sarf, founder and CEO at Create Every Opportunity, who adds that this debt burden highlights one of the biggest traps facing younger generations: the lack of financial education at the high school level.
“It is hard for a millennial to set themselves up for financial success when they lack basic financial literacy but it is hard to blame the students, especially when they are going through more than 15 years of schooling without being taught the basics on these financial topics,” Sarf said.
Fortunately, this money trap is losing some of its barnacles.
“We have finally seen 22 states in the U.S. pass basic financial literacy laws in high schools across the country and that is the key in helping set up future generations for financial success and help them avoid money traps,” Sarf said.
Waiting To Save for Retirement
When it comes to saving for retirement, time is on your side for only so long. You’ve got to be aggressive about it sooner than later.
“By beginning as soon as possible you are able to contribute more to your retirement savings but are also able to grow it more through the power of compounding,” Meade said. “Small delays in saving can have a huge impact on your outcome. Assuming a 7% return and a starting salary of $75,000 with a 2% increase per year below are the balances you could have in your retirement account at 50 by contributing 15% beginning at various ages:
- Start at 22: $1,014,071
- Start at 25: $779,384
- Start at 30: $485,936.”
Making Risky Investments
Again, millennials may feel like they have a long time before retirement, and this can cause them not only to delay saving but also to take more gambles on investments, or over-allocating funds into one type of investment vehicle like crypto, which is famously unstable. This approach is a money trap.
“You do not want to put all of your money into one stock, sector or type of investment,” Meade said. “Alternative investments, such as cryptocurrency, and individual positions in stocks should be no more than 5% of your overall portfolio.”
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