4 Common Mistakes I See Millennials Make with Money
A version of piece was originally written for and published on Business Insider
When my friends come to me with a question about their finances or looking for financial advice, sometimes they share that they’re a little embarrassed to open up. They might feel like they made a silly mistake, or they feel like they should know better but don’t.
As the chief operations officer for a fee-only financial planning firm, I assure them that whatever they have going on, I’ve probably seen worse, or more dramatic, or more cringeworthy; the point is, I’ve heard about a lot of crazy money stories.
Our firm focuses on helping professionals in their 20s, 30s, and 40s use their money as a tool to live a fantastic life right now while still planning responsibly for tomorrow. Everyone that we work with is really motivated to achieve big things — but that doesn’t mean they don’t stumble on occasion.
After years in the financial industry with a focus on working with folks my own age — and helping my own friends with their money, too — I’ve seen some of the same mistakes come up over and over again.
Here are some of the most common that you’ll want to avoid for yourself:
Keeping too much money in cash
There’s nothing like cash for liquidity and security. But you can have too much of a good thing.
When you keep money in cash, it’s fairly safe and easy to access. You risk virtually nothing, which is very unlike money you invest. All investments are subject to the risk of loss — which might lead you to wonder why you should bother to invest at all.
It’s because you can’t earn a return without taking some degree of risk. And that is the downside of cash: with very little risk, there’s essentially no ability to put that money to work in earning a return and making more money.
Even modest returns on your investments (say, an average 4 percent return on a highly conservative, lower-risk portfolio) will help you generate the money you need to meet your goals, like funding your eventual retirement.
Cash, on the other hand, pretty much just sits there… and the longer it sits, the higher the odds that it will actually lose purchasing power due to inflation.
If inflation rises, on average, about 2 to 3 percent per year but your cash earn less than 1 percent sitting in the bank? Your dollars simply won’t go as far 10, 15, or 20 years into the future.
You do want to keep your emergency fund money in the bank where it’s safe and easy to access. You’ll also want to maintain your short-term savings in cash (this is money you plan to use sometime in the next 5 years). If you have additional cash after accounting for those items, it might make sense to invest it rather than leave it hanging around your bank.
Failing to understand how your credit score really works
Myths about credit scores and what impacts them abound. If you don’t get your facts straight about how your credit score works, your efforts to raise your score could backfire or even cost you money.
Credit scores run from 300 (the worst) to 850 (the best) — but as long as you have a score of 740 or higher, you’ll likely qualify for the best rates a lender can offer when looking for financing. It’s satisfying to have a credit score of 800 or above… but it really doesn’t do anything for you that a score of, say, 760 can’t do too.
Your FICO score — the main measurement used by most lenders — is made up of various components, which are all weighted differently. Your payment history (whether you make payments on time and in full) as well as the amounts you currently owe (your debts and balances) matter the most.
Because of this, the most important things you can do to build and maintain a good credit score are to:
- Make all your payments for credit cards, loans, and other debts on time, and pay the full amount due. Don’t carry balances if you don’t need to, since this can drag your score down and cost you money thanks to interest.
- Keep your credit utilization on credit cards to 30% or less at any one time (meaning, don’t use more than 30% of your available credit at one time if possible).
There’s no need to take out loans for the sole purpose of increasing your score; simply managing one credit card well over time and avoiding consumer debt will provide you the opportunity to establish and build good credit.
Ignoring your company benefits
Switching jobs after a year or two is not nearly as uncommon or frowned upon as it once was (and in some industries, it’s expected or even encouraged). Because of this, you might not pay too much attention to the benefits offered at your current company.
To a degree, that might be reasonable; many employer-sponsored plans or benefits come with a vesting schedule requiring you to put in so many years of service before you get full access to the perk.
But just because you assume you won’t be at the company in a year doesn’t mean you’re guaranteed to move on. You don’t want to put off contributing to a retirement plan because you think you’ll go to a new company in 6 months… only to find yourself in the same place 4 years later with a $0 retirement account balance because you never bothered to start.
Even with a vesting schedule, your contributions are always yours, so it’s worth taking advantage of the benefit for as long as you can — whether that ends up being a year or two or a decade or more.
Maxing out your budget with big-ticket items
If I had to name the most common mistake I see millennials make, it would have to be figuring out how much house they can afford… and then purchasing a home at the tippy-top of that range.
This might not seem like a big deal, especially if you can afford the purchase and it just happens to be at the top end of your budget.
But the problem is maxing out on what you can spend right now leaves you no wiggle room in your cash flow for adding any other expenses, like having kids — which is a big reason people want to buy the maximum amount house for themselves in the first place!
Living within your means is good advice, but there’s a difference between just squeaking by and living well below your means.
The latter ensures you have money left over to use for other important purchases and goals, like investing to grow-long term wealth, adding to your family, or simply enjoying what life has to offer beyond the biggest mortgage payment you can technically afford.
