If you’re a millennial, you likely already know that your generation gets a bad rap when it comes to managing your money. Unfortunately, it’s hard to refute this stereotype when research shows that it’s fitting.
A 2015 study by the Global Financial Literacy Excellence Center at George Washington University found that the majority of millennials don’t have basic financial knowledge, and more than half aren’t happy with their financial situation.
Certainly, some millennials are better with their money than other generations. But many are prone to money mistakes. So if you want to get on the right financial track, watch out for these money traps that can trip you up if you’re a millennial.
Lacking a Basic Financial Education
When it comes to millennials and money, the biggest trap they can fall into is failing to understand common sense money concepts, said Douglas Boneparth, co-author of “The Millennial Money Fix” and president of Bone Fide Wealth in New York City. “Millennials, like most generations, haven’t really afforded themselves a basic financial education,” he said.
Many millennials likely didn’t get a financial education in school because, according to the Council for Economic Education, only 17 states require high school students to take a course in personal finance. But according to Boneparth, that’s no excuse. With so many resources available online, you can educate yourself. “Roll up your sleeves, get reading,” he said.
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Spending Without a Plan
Budgeting for millennials seems to be a challenge. A survey by digital banking app Varo Money found that the majority of millennials check their bank balance at least once a week, but more than half rarely or never plan out monthly spending in advance. In fact, 35 percent of those surveyed said they’d rather vomit than make spreadsheets for their finances.
“Millennials must do more than spend based on what's in the account,” said Jason Vitug, author of the bestselling book “You Only Live Once: The Roadmap to Financial Wellness and a Purposeful Life.” “I urge millennials to take a more hands-on approach with their cash through a budget.”
Don’t think of a budget as a way of tracking where your money has gone, but rather a way to plan where you want your money to go. “A budget is a framework to achieve goals, and by simply using your checking balance to determine what you can or can't afford leaves off the opportunity to spend on bigger things down the road,” Vitug said.
Not Having Financial Goals
As Vitug said, a budget can help you align your spending with your goals. But that assumes you have goals. Unfortunately, many young adults don’t know what they want, Boneparth said. This is a money trap millennials should avoid.
“If you don’t know what you want, how do you know what you’re working toward?” Boneparth said. Millennials need to figure out what they value most — whether it’s traveling, buying a home, starting a family or achieving financial independence. Calculate how much those goals will cost and create a plan to achieve them.
Not Figuring Out Whether a Degree Will Pay Off
Another big money mistake millennials make is not knowing whether they’ll get a return on their investment by going to college or getting an advanced degree, Boneparth said. It’s one of the largest financial decisions of your life, so you need to figure out whether it’s worth the cost, he said.
“If you’re unsure about what you want to do in the world, you probably should not leverage [your finances] significantly to find out,” he said. Instead, you might want to pursue a high-paying job that doesn’t require a college degree. Or, if you’re considering whether to go back to school, research whether an advanced degree will pay off for the career you want.
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Taking on Too Much Student Loan Debt
Many college graduates are burdened by student loan debt, which is one reason why the middle class faces a bleak financial future. A study by Prudential found that the average amount of student loan debt a 2016 college graduate had was $37,172 — nearly triple the average of 20 years ago.
Although you might see the value in a college education or advanced degree, be aware that borrowing money to pay for that education might actually hurt your financial well-being. Of those surveyed by Prudential who have student loans, about four in 10 are struggling financially. And many say that their student loan debt has delayed them from buying a home and saving for retirement. So before taking out loans to pay for school, look into work-study programs, scholarships or a part-time job that can reduce your need for borrowing.
Not Caring About Your Credit
Among millennials' characteristics that could be hurting them financially is not caring about their credit. Millennials are less aware of their credit standing and place less importance on it than other generations, a survey by Discover found. However, it’s a mistake not to keep tabs on your credit. Your credit score matters because lenders use it when deciding whether to give you a loan or credit card, landlords might use it when deciding whether to rent you an apartment and even cellphone companies check it when deciding whether to offer you deals.
“The most important thing younger consumers can do is become aware of their credit standing early, and stay on top of it by checking their score frequently,” said Ryan Scully, Discover’s vice president of new customer acquisition marketing. You can check your FICO score, the most commonly used credit score, for free with Discover Credit Scorecard. You also can get a free version of your score on GOFreeCredit.com.
Not Using Credit at All
Some millennials make the mistake of not using credit at all. “It’s beneficial for consumers to have a healthy mix of credit, either through responsibly managed credit cards or loans,” Scully said. That’s because 10 percent of your FICO credit score is based on the mix of credit you have, according to myFICO.
How long you’ve had credit is another factor in FICO scores. Even more important to your score, though, is credit payment history — whether you’ve regularly made on-time payments. Using a credit card responsibly — paying off everything you charge each month — might help you build your credit and improve your credit score.
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Thinking You Have Time to Save for Retirement Later
Millennials' saving habits could use improvement. A recent GOBankingRates survey found that millennials ages 25 to 34 are more likely than other generations to say they’re not saving for retirement because it isn’t a priority.
“Saving for retirement isn't exactly the sexiest thing in the world when you're young,” said Clint Haynes, a Kansas City certified financial planner and president of NextGen Wealth. “Most of us are much more concerned about experiences and having fun — and for many, paying off student loan debt.”
But thinking you have plenty of time to save for retirement later can be a mistake. For example, to save $1 million for retirement, you’d have to set aside more than twice as much each month if you started saving at 35 rather than 25 — assuming a 7 percent annual return. So don’t wait.
“The worst thing that could happen is you get to quit working earlier than you expected,” Haynes said. “Now, that's not so bad.”
Being Afraid of Investing
Millennials need to get into the habit of investing. “A common barrier for millennials is that many don’t feel they know enough to invest, which is holding them back from getting started,” said Rich Hagen, president of online trading platform Ally Invest.
You might be afraid you’ll lose your money in the stock market, but you’re putting yourself at a bigger risk of not having enough money for retirement if you put your money in a savings account with a paltry return. Your money won’t grow at a fast enough rate to keep up with inflation. That's a money trap to avoid.
To get over your fear of investing, Hagen said you can take the mystery out of the process by reading articles or watching videos to educate yourself. When you do invest, make sure you don’t put all of your money into one stock. Consider low-cost index funds that track the performance of major stock market indexes.
Rushing Into Investing
While some millennials fall into the trap of not investing, others rush into it too early, Boneparth said. It’s great to save for retirement, but you need to make sure you’ve covered some other important financial bases before you start investing a lot of money.
For example, if you have limited funds and are just starting out, make building an emergency fund a priority, Boneparth said. Also, if you have a lot of high-interest consumer debt, focus on getting rid of that. “Many will say invest early and often,” Boneparth said. “But if you can barely pay bills, you might need that money.”
Falling for Scams
Millennials might fall into the trap of thinking that they won’t ever get scammed. But, in reality, they are more vulnerable to scams than older generations, said Doria Lavagnino, co-founder of CentSai, a financial wellness platform for millennials. More than two-thirds of scam victims are under the age of 45, according to the Better Business Bureau.
Millennials are more likely to be victims because they are the first generation to do most transactions online, Lavagnino said. Plus, they’re often more comfortable providing personal details over social media.
To reduce your risk of becoming a victim of scammers, Lavagnino recommended creating passwords for online accounts that have a combination of letters, numbers and characters, and changing them every three months. Don’t use public WiFi to check financial accounts. Scan your bills and accounts monthly for unusual charges. Also check your credit report once a year to see if there are any accounts you didn’t open, which could be a sign of fraud.
“These are very common sense steps that can make a big difference,” she said.
Spending More Time on Social Media Than Your Finances
Millennials spend more time on social media than other generations, a GOBankingRates survey found. And they do so at the expense of their finances. The survey found that millennials spend more than twice as much time on social media each week than on their finances.
Social media can have other negative effects on your finances, aside from just consuming time you could use to manage your money. Seeing your friends post pictures of all the fun things they’re doing might make you feel pressured to spend more to keep up with them, Boneparth said.
“Sometimes you have to put the blinders on,” he said. “Think about what you’ll be able to do if you stay on track.”
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