5 Mistakes Millennials Make When Building Their Financial Life

For young people still trying to establish their careers, focusing on retirement or saving for the future may not seem like a top priority. But making the wrong money moves early on can be costly.
Here are the five most common mistakes young adults make when building their financial lives:

1. Waiting too long to start saving for retirement

Planning for retirement is about finding a balance between setting money aside for later and having enough to pay for things now. But financial planners warn that the price of delay can be high.

Thanks to compound interest, even the most modest amounts of savings will grow exponentially over longer periods of time.

For example, someone who started saving $100 a month at age 25 could grow their money to about $150,000 by age 65, with a 5% rate of return. Meanwhile, if you wait until age 35 to start saving $100 a month, you’ll end up with little else. half of that money at retirement age.

But most people don’t start early enough to take advantage of that compound interest factor.

In a recent Natixis report, 60% of respondents said they will have to work harder than expected to retire, and 40% said it will “take a miracle” to safely retire.

“Some people delay retirement contributions because they still have student debt, but a bigger reason is that they think retirement is a long way off, but if they wait too long to start, they may need to catch up or plan for a later retirement.” , said. Jay Lee, Certified Financial Planner at Ballaster Financial.

2. Not maxing out a 401(k)

One mistake younger workers often make is not taking full advantage of their 401(k). Although retirement may seem a long way off, investing in a tax-advantaged retirement savings plan like a 401(k) can give you more freedom to pursue other financial goals.

Plus, you could be leaving money on the table if your employer offers matching contributions.

“Many employers match contributions to a 401(k), which means maxing out can significantly increase the money in your account,” Lee said, “and because contributing to a 401(k) is tax-deductible, it can leave you with more money for investments or expenses. ”

How much do I need to save for retirement?

In addition to a traditional 401(k) plan, financial planners also encourage young adults to explore other options that might be a better fit for them, such as a Roth 401(k), which doesn’t offer an upfront tax advantage but is free. tax when you withdraw. in retirement.

“A Roth 401(k) account might make more sense [for younger people] because they’re typically in a lower tax bracket than when they retire,” said Lamar Watson, a Reston, Virginia-based certified financial planner.

3. Falling victim to lifestyle inflation

“Lifestyle inflation” or “slow lifestyle” occurs when people begin to perceive old luxuries as necessities.

“Social media creates a desire to keep up with others,” said Nick Reilly, a Seattle-based certified financial planner. “Fear of missing out, combined with an ‘I earned it’ mentality, has led to more Millennials spending most of their earnings on things that provide short-term satisfaction and status.”

Young adults often underestimate how much they can save on rent and food, and how overspending can seriously derail other financial plans.

“Living in a walk-up apartment versus a building with elevators probably won’t feel that different when you’re young, but it can save a lot of money,” Watson said. He suggests keeping rent below 25% of your monthly gross income and food expenses below 15%.

4. Not having enough emergency savings

Emergency funds can save the day if you lose your job, get too sick to work, or have other unexpected bills to cover. However, younger people can sometimes be overconfident and ignore those risks.

“It’s not surprising to see young adults without any emergency funds,” Lee said, “which is concerning because it’s a major financial buffer and can keep you from going deeper into debt.”

How much do I need for emergency savings?

Lee said any amount is a good starting point, but in general, single people should set aside six months of expenses for an emergency. For dual-income couples, the amount must be at least three months.

5. Holding too much in volatile assets like cryptocurrencies

While newer investments like NFTs, meme stocks, SPACs, and cryptocurrencies can provide attractive growth potential, overlooking their volatility can put your financial health at serious risk.

“Thanks to social media, there’s a good chance everyone knows someone who got rich quick from at least one of these opportunities,” Reilly said.

Some financial planners also call this the “Shiny Object Syndrome”. High-risk, high-volatility investments are increasingly attractive to younger investors looking to build wealth quickly and can make more established, long-term wealth-building methods like stocks seem boring.

“But it’s extremely dangerous to put all your money in high-risk assets like NFTs or cryptocurrencies,” Watson said, “when it comes to financial planning, it’s more about preparing for the worst than chasing the highest yield.”

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