5 Money Mistakes Millennials Can Make
Because of a steadily increasing lack of personal finance education in most schools, many millennials may be unsure how to manage their finances effectively and plan for the future. In fact, the United States ranks 14th in the world for financial literacy– well behind countries like Germany, Canada, and Australia.
Without an understanding of concepts like credit, interest, and the impact of high debt, it’s easy to fall prey to financial mistakes. Here are some of the most common blunders that a millennial may make with their money, along with tips for staying on a solid financial path.
1. Neglecting to make a budget
If the concept of creating a budget is completely foreign to you, you’re not alone. A recent study revealed that only 40% of Americans (from all generations) use a budget to manage their money. Why is budgeting important? It allows you to plan, so that you have enough money from each paycheck to pay your bills, save for the future, and stay prepared for unforeseen expenses.
The first step in setting up a budget is understanding how much money you have coming in, versus how much you spend. You can set it up to match the cadence of your paychecks or by the month.
Next, track every dollar you spend for at least a month. Take note of every single known or recurring expense you have, and how much you spend on each one. Now, look at the other expenses on your tracking sheet. Do you notice any spending patterns? Another positive effect of budgeting is that it shines a spotlight on unhealthy financial habits.
2. Not planning for retirement
When you’re young, saving money for retirement may not seem like a priority. In reality, it’s never too early to start saving. As the cost of living increases, it is more important than ever for millennials to save enough for retirement.
Saving doesn’t have to be painful. As a start, find out if your company has a 401k plan match. For example, if you save 3% of your paycheck for retirement and your company matches up to 3%, you’ve just doubled your savings. Don’t leave money on the table.
Another way to tuck away substantial savings over time is through an investment app that rounds up your purchases and adds the extra change to a managed investment account. Small amounts snowball into big savings over time. Don’t wait to start saving for retirement.
3. Overlooking tax deductions
Nobody likes to think about paying taxes, but it’s an unavoidable part of life. The good news is that with a little extra scrutiny, you may find deductions that you’ve been overlooking. Every deduction equals more money in your pocket.
Another note on taxes: many millennials work full time as independent contractors or earn money doing part-time freelance work. If taxes aren’t deducted from your paycheck automatically, make sure you understand your estimated taxes and are budgeting enough to pay every quarter. On the plus side, there are many deductions for independent contractors and remote workers. Cell phones, computers, and office space are only a few of the business deductions that could reduce the amount of tax you owe.
If you’re not sure how to identify the deductions you’re entitled to claim, it may be a good investment to consult a tax advisor. The money you save on your tax bill could more than pay for tax preparation services.
4. Taking on too much debt
Between student loans and credit cards, many millennials find themselves carrying a large amount of debt. Debt has a way of snowballing out of control. When you’re making large payments to lots of creditors, you feel like you’re living paycheck to paycheck. If you want to shake yourself free from the burden of debt, you must commit to two things:
- Don’t buy things you can’t afford. If you can’t pay cash for something you want, wait until you’ve saved the money to pay up front.
- Use every extra dollar to pay down debt. You could start with high-interest debt first to reduce the amount of interest you pay over time, or start with smaller debts, paying each one off quickly to gain momentum.
Go back to the budget you created and allocate a portion of your income to paying off debt. You’ll improve your credit rating while having even more money to save for the future.
5. Failing to save for emergencies
If you don’t have a dedicated emergency fund, start one today. One of the biggest reasons that people fall into debt is that they don’t have money tucked away for unforeseen expenses. Major car repairs, medical bills, job loss–all unplanned events that can derail even the most dedicated budgeter.
To keep your finances on track when life throws a curveball at you, start with an emergency fund of at least $1,000. It should be separate from your regular savings or retirement account, and easily accessible when you need it. Do not, however, use it for expenses that are not true emergencies or necessities.
If the thought of saving a thousand dollars feels impossible, don’t despair– there are lots of ways to find some extra money to devote to your emergency fund.
- If you get a tax refund, resist the temptation to spend it. Dedicate it to your emergency fund
- When you get an unexpected bonus or gift, put it in your fund for a rainy day
- If you just can’t spare any of your regular income to fuel it, consider a side job to make some extra cash
As you take a look at your financial health and your spending habits, don’t fall victim to these, or any other common money mistake. Take charge of your financial health one step at a time. It takes determination, but the results are well worth it.