Ignoring the value of credit
Africa Studio/shutterstock There are costly money mistakes we all make. For Millennials, who were born into a recession and watched their parents struggle with credit, one of those mistakes is avoiding credit. A 2016 Bankrate survey found that less than one-third of Millennials have a credit card account, compared to over half of consumers above age 30. They tend to believe debit or cash transactions are a safer alternative, but they may not be the best bet in the long term.
"Ignoring credit entirely will produce a limited credit profile," warns Financial Advisor Michael Zaino. "When you do need credit for larger purchases such as a home or a car, lenders will have no way to evaluate your risk. You'll have more trouble getting a loan and will likely pay higher interest for the unknown risk that you present."
Zaino, founder of TZG Financial in Charlotte, North Carolina, practices what he preaches. "The day my daughter turned 18, I got her a credit card and taught her how to responsibly use it. I also made sure she was listed on the loan I took out for her car so that her credit would build while she was in college, giving her a head start on life." Here are 11 easy ways to improve your credit score today.
Aversion to risk
On the positive side, Millennials do tend to invest—but, according to a survey from AMG Funds, stocks make up only 30 percent of the average Millennial's portfolio. That's almost one-third below the equity holdings of the average older investor.
Zaino, who counsels the Millennial children and grandchildren of his primary client base, says, "Younger investors who can't handle the risk associated with stocks are missing out on significant long-term growth through higher returns and the positive effects of compounding interest. In addition, younger investors have more time to gain back any losses caused by market corrections or recessions. Being overtly risk-averse and not taking advantage of the upside potential is not the way to go."
Ignoring student loans
According to the Wall Street Journal, approximately 13 percent of student loan debt in the repayment stage is in default. Student loan default has long-lasting financial consequences since it generally can't be discharged in bankruptcy.
While many graduates simply don't have the income to make their loan payments, others are downplaying their obligation or ignoring it entirely. Don't ignore the help that's available. Income-based repayment options and other forms of assistance are available through the Federal Student Aid website. Check out where your student loan money goes.
Not paying estimated taxes
RomanR/Shutterstock Freelance part-time jobs in the "Gig Economy," such as Uber driving and finite contract work, appeal to Millennials who prefer to focus on lifestyle choices rather than optimizing income in a traditional career. However, this lifestyle requires discipline in money management, time management, and contract negotiation skills. A gig lifestyle can be very rewarding—if you are prepared for what it takes to make a freelance living. One of those things is paying estimated quarterly taxes.
Millennials who start earning money as freelancers or independent contractors need to set aside funds for taxes on a federal and local level, depending on where they live and work. Without an employer to kick in their share, self-employed Millennials have to pay both halves of their Social Security tax! Zaino advises opening up a separate account and depositing at least 25 percent of those untaxed earnings into the account in order to avoid being caught in the unfavorable position of owing the government more than you can pay.
And in case you're still wondering what to do when you grow up, these are the jobs with the happiest workers.
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Living beyond their means
Millennials may be debt-averse in general, but they are prone to lifestyle choices that can accrue significant debt in small increments. A recent survey from CompareCards.com by Lending Tree found that three of the five top expenses that create Millennial credit card debt were making ends meet, eating out, and clothes shopping. This suggests misplaced priorities and a lack of a reasonable budget (or an unwillingness to stick to one). Reports Zaino, "I can't tell you how many young people I see who land a good job, or a bonus, and then go right out and finance a BMW or other luxury car. Millennials get a raise, and then upscale their house. Before they know it, they're drowning in debt trying to keep up with the Joneses, but what they don't realize is that the Joneses are broke!" Read more about the study on CompareCards.com. Don't miss these tips on how to stick to a budget.
Not saving for retirement
This is a biggie. "Many Millennials are happy to spend now as opposed to saving for retirement since it's so far off in the distance," reports Zaino. "But the longer you wait, the more you lose out on compound interest. There's a reason Albert Einstein called compound interest 'the Eighth Wonder of the World.' Those who understand compound interest and the way it works will earn it; those who don't will pay it. Plus," he adds, "investing in tax-deferred retirement accounts could also minimize your current tax burden." Try a Retirement Planner to see if you are on pace to retire without jeopardizing your lifestyle.
And check out the things people wish they'd done for their retirement before it was too late.
Andrey Popov/Shutterstock Lack of investment understanding can lead to unrealistic Millennial expectations. The AMG Funds survey found that Millennials expect an average return of 13.7 percent on their investments—well above the 7.7 percent expected by baby boomers. That's achievable, but it doesn't square with a portfolio that is light on equities. "Millennials may have such high expectations since they haven't lived as an investor through down markets and fully experienced those negative effects," Zaino says. "Combine that with the meteoric rise of cryptocurrencies like Bitcoin, and their expectations may be a bit skewed. They need to understand that just because you hear about a penny stock that has doubled in a month, it doesn't mean it's necessarily true or that it will happen for you."
Here are more money management tips every recent grad should know.
Missing out on earning rewards or cash back
Besides not building credit, those who use debit cards are missing out on valuable credit card benefits, such as travel rewards and sign-up bonuses (here are some examples of when not to use your debit card). Says Zaino, "Some cards, like the Capital One Venture card, give you double miles on everything. Other cards will give you cash back, but under restrictions. And debit cards don't have to offer the consumer protections that credit cards do."
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Not taking full advantage of a 401(k)
A 401(k) plan allows you to contribute to a tax-deferred retirement stream automatically. Avoid the temptation to delay 401(k) contributions and find other uses for those funds. In addition, by contributing to a 401(k) plan as soon as you are eligible, you can maximize the growth of your retirement account.
If your employer offers matching funds with their 401(k) plans, you really should take full advantage. Anyone who does not contribute to a matching 401(k) plan up to the matching limit is essentially refusing free money. "Why would you refuse free money?" asks Zaino.
Investing primarily in fads like Bitcoin
GeniusKp/Shutterstock Whether Bitcoin's price is destined for six figures or total annihilation, investors keep lining up for Fear Of Missing Out. Says Zaino, "It's very difficult to ignore what the cryptocurrency has done in the past year, especially since October. But it's unregulated, and still the Wild, Wild West. My advice: Don't sit down at the table with more than you're prepared to lose. It's like Vegas, but Vegas wasn't built on winners."
Letting credit card debt pile up
While some Millennials hesitate to get credit cards, others use them a little too enthusiastically. Warns Zaino, "There is no good reason for buying things on credit that you can't afford. The best scenario is paying off your credit balance in full each and every month. Letting it pile up just causes you to pay way more than you have to as the compound interest works against you. Don't believe me? Take a look at your statement and see how many months it will take to pay off your current debt if you keep making minimum payments… or how many years!" Here are five smart ways to reduce debt stress.
Not saving for a rainy day
4 PM production/Shutterstock
Millennials think that since they're young and healthy, nothing bad will happen to them. Sadly, life doesn't work that way. Illness and accidents happen, jobs end, and no one knows what the future holds. It's best to invest in a liquid emergency fund that could tide you over for three to six months of living expenses if the unthinkable happens. Check out these 56 simple tips for saving money.
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Trusting technology over people
Pressmaster/Shutterstock Millennials are more comfortable with online services for all of their financial transactions, including financial advice. According to the AMG Funds survey, 84 percent of Millennials believed they would get more objective advice from robo-advisors than live ones, and 70 percent believed that robo-advisors would provide higher returns. That's not necessarily a bad approach, as passive funds often beat actively managed funds. However, it can leave Millennials reluctant to ask for help on financial matters, as they prefer to seek their own answers through Internet resources. A live advisor can provide a different perspective, helping you to assess your goals and create a more personalized plan.
Admits Zaino, "I'm old-school. I trust people over Fintech. And while I think it's important to fully utilize the tech tools at my disposal, I think it's more important to offer my clients a personal touch. And they agree, preferring to meet with me, ask questions, and bounce different scenarios off of me for my input. Plus, I operate at a fiduciary standard, meaning I'm legally obligated to act in their best interest."
Millennials have fewer years of experience filling out their own taxes and, according to a 2016 Bank of America study, an insufficient education about them. When young Americans were asked what they wished they had learned more about in school, 40 percent listed "how to do taxes," second only to "how to invest."
Millennials can always turn to tax software to fill out their forms, but that won't help with the financial planning necessary to minimize the tax burden. For example, they should learn the difference between tax-deferred and tax-exempt investments. As the federal tax laws change under the recent legislation, now is a great time to learn about taxes.
Be sure to check out these things your tax accountant won't tell you.
Spending every raise
When you do get an increase in pay, Zaino advises, "Ignore the raise, and apply it to long-time investment goals. Maybe take 5 to 10 percent of it to spend on yourself as a reward for your hard work, but invest the rest. Look at it this way: You've been living without it for this long; why just blow it on instant gratification?" Learn the funny trick that can get you a bigger raise.
Paralysis by analysis
WAYHOME studio/ShutterstockWith encyclopedias of data at their fingertips, Millennials can spend days searching the Internet trying to make financial decisions. Nevertheless, all that time devoted to research still may not produce the right answer for a particular investment or purchase. Sometimes you need to make the decision with your gut instincts. Cautions Zaino, "Think about the amount of time you're spending versus the time-value of money. You don't want to spend two hours of your valuable time to save $2!" Don't miss these top tips on how to manage your money.
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