Whether you call them Gen Y, millennials or erroneously lump them together with the following younger generation, Gen Z, this demographic of 20 to 30-somethings is changing the way the world gets things done. Millennials are generally considered to be those born between the years of 1981 and 1996, comprise of 83.2 million Americans and have definite ideas for taking control of their financial futures. However, there are some financial mistakes that are common amongst millennials, often due to lack of preparation or awareness.
1. Not Creating a Budget
One of the top money mistakes that everyone, not just millennials, needs to avoid is failing to make a budget. Without a budget, you’re more likely to overspend on frivolous wants rather than paying down debt or saving for your retirement. Your budget can be as complex or basic as you need it to be. However, at minimum, your budget needs to include your monthly essentials such as rent, utility bills and minimum monthly payments on credit cards, student loans and car payments.
Your budget should also include things like savings and retirement goals as well as a portion set aside for fun or non-essential expenditures. A simple, introductory budget popular with millennials can be found in Senator Elizabeth Warren’s book entitled, All Your Worth: The Ultimate Lifetime Money Plan, and is known as the 50-30-20 rule. The 50-30-20 budget rule lets you allocate 50 percent of your after-tax income on necessary living expenses, 30 percent on non-essential wants and the remaining 20 percent on your debt and savings or investing.
2. Failing to Save Effectively
While millennials are good at saving their money, are they doing so in the most effective ways? According to a Charles Schwab & Co client data study, millennials keep 25 percent of their savings in cash. Although it is important to have available cash on hand in a checking or basic savings account for emergencies, there are much better accounts that will help grow your money. When you have too much money at your immediate disposal, you may be more likely to overspend, and less likely to be taking advantage of potential higher yields.
Opening a high-yield savings account is an effortless way to get your money to make more money for you. Compared to the 0.09 percent average interest (at time of publication) you’ll earn with a basic savings account, your money could earn you 10 to 20 times the interest were you to put it in a high-yield savings account that has a 1.70 percent APY, or annual percentage yield. Be sure to shop around for the best high-yield savings account online as some banks do require the account holder to keep a minimum account balance.
3. Not Planning for Retirement
Although millennials may face a lot of flack for many things, saving for retirement isn’t one of them. According to a recent Forbes article, 71 percent of working millennials are saving for their retirement. And, not only are they saving, they’re doing so at a younger age – 24 – than their Gen X predecessors, whose median age for saving for retirement was 30. However, Gen Y millennials also seem much more averse to putting their money into the stock market or long-term investments.
Millennials tend to place their money primarily into stable investments such as bonds, money market accounts or savings accounts, and 66 percent of millennials aged 18 to 29 feel as though the stock market is intimidating, states the Forbes article.
This reluctance to invest in long-term retirement vehicles such as IRAs, 401Ks or in the stock market means that many millennial portfolios aren’t as diversified – or taking the best advantage of higher investment growth potential and tax credits – as they could be. Sitting down and speaking with a certified financial planner would go a long way in helping you determine how to appropriately diversify your savings and investments. Doing this will ensure that when your retirement years arrive, you’ll have a nice nest egg waiting for you.
4. Using Credit Irresponsibly
One of the hardest financial mistakes for many young people to avoid is the overuse of credit cards. Using a credit card responsibly takes discipline, and you could find yourself learning the hard way. Before you overspend and realize the error of your ways, it’s worth getting in the habit of using your credit wisely. In its simplest explanation, your credit utilization rate or ratio is the amount of credit debt you owe divided by your credit limit. Typically expressed as a percentage, this ratio is a good indication of your spending habits.
Over-utilization may be common in your 20s, but it can set you on a path of long-lasting obstacles that later in life will make it harder for you to get financed for a car, move into your own apartment or buy a house one day. According to an Experian credit study, millennials are tied with Gen Xers for top credit utilization rates at 37 percent. It’s best to keep your credit utilization at 30 percent or less, this way when you need to qualify for something, you know you’ll be able to.
5. Not Learning About Taxes
Having to worry about taxes probably isn’t too high on many people's lists, but having at least a working understanding of current tax laws can go a long way towards saving you more money when the time comes for you to square up with Uncle Sam. If you don’t have your taxes prepared by a tax professional, or you aren’t familiar with the various tax credits or refunds you may be eligible for, you are likely letting money slip through your fingers.
Also, just as easily as you could be missing out on opportunities to increase your refund or lower your tax bill, you may be neglecting to declare money you earned through one of your side gigs such as driving for Uber. This is where you end up owing the IRS money, which can quickly spiral out of control. It’s best to not only make sure that you’re taking advantage of all the tax credits that you qualify for, but that you’re also reporting all of your income, from all sources, correctly as well.
- Business Insider: The 4 Money Mistakes I see Millennials Making as a Finance Coach
- Tax Act: 4 Common Money Mistakes Millennials Make
- Forbes: Millennials Are Good At Saving, But Investing? Not So Much
- Smart Asset: What Is the Average Interest Rate for Savings Accounts?
- Bankrate: Guide to Millennial investing
- Experian: What is a Credit Utilization Rate?
- U.S. News: 6 Money Management Mistakes Millennials Often Make
- Pocketsese: 15 Facts About Millennials and Their Finances
- Pocketsense: How to Budget Money for Young Adults
- Pocketsense: What Percentage of My Income Should Go to Paying Bills & Debt?
- Brookings Institution. "11 Facts about the Millennial Generation." Accessed July 17, 2020.
- Board of Governors of the Federal Reserve System. "Why Does the Federal Reserve Aim for 2 Percent Inflation Over Time?" Accessed July 17, 2020.
- U.S. Department of Education. "Federal Student Loan Portfolio." Download "Portfolio by Age." Accessed July 17, 2020.
- Pew Charitable Trusts. "The Complex Story of American Debt," Page 15. Accessed July 17, 2020.
- Transamerica Center for Retirement Studies. "What Is Retirement? Three Generations Prepare for Older Age," Pages 10-11. Accessed July 17, 2020.
- Social Security and Medicare Board of Trustees. "Status of the Social Security and Medicare Programs: A Summary of the 2020 Annual Reports," Page 11. Accessed July 17, 2020.
- Pew Research Center. "Millennials in Adulthood." Accessed July 17, 2020.
- U.S. Census Bureau. "By 2030, All Baby Boomers Will Be 65 or Older." Accessed July 17, 2020.
Tara Thomas is a Los Angeles-based writer and avid world traveler. Her articles appear in various online publications, including Sapling, PocketSense, Zacks, Livestrong, Modern Mom and SF Gate. Thomas has a Bachelor of Science in marine biology from California State University, Long Beach and spent 10 years as a mortgage consultant.