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Millennial Money Traps and How to Avoid Them

Here's how to avoid these money mistakes anyone could make.


By Cameron Huddleston, GOBankingRates

If you’re a millennial, you likely already know that your generation gets a bad rap when it comes to managing money. Unfortunately, it’s hard to refute this stereotype when research shows that it’s fitting.

A 2018 GOBankingRates survey that tested Americans’ knowledge of basic finance terms found that young adults lack some basic knowledge. And, a growing percentage of millennials had nothing in their savings accounts, a separate survey found in 2017. If you want to get on the right financial track, watch out for common money traps that could leave you figuring out how to dig your way out of major debt.


Lacking a Basic Financial Education


When it comes to millennials and money, the biggest trap they can fall into is failing to understand commonsense money concepts, said Douglas Boneparth, president of Bone Fide Wealth in New York City and co-author of “The Millennial Money Fix: What You Need to Know About Budgeting, Debt, and Finding Financial Freedom.” “Millennials, like most generations, haven’t really afforded themselves a basic financial education,” he said.

Many millennials likely didn’t get a financial education in school. Only 17 states require high school students to take a course in personal finance, according to a 2018 report by the Council for Economic Education. But to Boneparth, that’s no excuse. With so many resources available online, people can educate themselves. “Roll up your sleeves, get reading,” he said.


Spending Without a Plan


Budgeting for millennials seems to be a challenge. A 2017 survey by digital banking app Varo Money found that the majority of millennials check their bank balance at least once a week, but more than half rarely or never plan out monthly spending in advance. In fact, 35 percent of those surveyed said they’d rather vomit than make spreadsheets for their finances.

“Millennials must do more than spend based on what’s in the account,” said Jason Vitug, author of “You Only Live Once: The Roadmap to Financial Wellness and a Purposeful Life.” “I urge millennials to take a more hands-on approach with their cash through a budget.”

Don’t think of a budget as a way of tracking where your money has gone: Rather, it’s a way to plan where you want your money to go. “A budget is a framework to achieve goals, and by simply using your checking balance to determine what you can or can’t afford leaves off the opportunity to spend on bigger things down the road,” Vitug said.


Not Having Financial Goals


As Vitug said, a budget can help you align your spending with your goals — but that assumes you have goals. Unfortunately, many young adults don’t know what they want, Boneparth said. Financial aimlessness is a money trap that millennials should avoid.

“If you don’t know what you want, how do you know what you’re working toward?” Boneparth said. People need to figure out what they value most — whether it’s traveling, buying a home, starting a family or achieving financial independence. Calculate how much those goals will cost and create a plan to achieve them.


Not Figuring Out Whether a Degree Will Pay Off


Another big money mistake that millennials make is not knowing whether they’ll get a return on their investment by going to college or getting an advanced degree, Boneparth said. It’s one of the largest financial decisions of your life, so you need to figure out whether it’s worth the cost, he said.

“If you’re unsure about what you want to do in the world, you probably should not leverage [your finances] significantly to find out,” he said. Instead, you might want to pursue a high-paying job that doesn’t require a college degree. Or, if you’re considering going back to school, research whether an advanced degree will pay off for the career you want.


Taking on Too Much Student Loan Debt


Many college graduates are burdened by student loan debt, which is one reason why the middle class faces a bleak financial future. A study by Prudential found the average amount of student loan debt that 2016 college graduates left school with was $37,172 — nearly triple the average from 20 years earlier.

Although you might see the value in a college education or an advanced degree, beware that borrowing money to pay for that education might hurt your financial well-being. Among the college graduates surveyed by Prudential who took out student loans, about four in 10 said they were struggling financially. And many said that their student loan debt has delayed them from buying a home and saving for retirement. So before taking out loans to pay for school, look into work-study programs, scholarships or part-time jobs that can reduce your need to borrow.


Not Caring About Your Credit


Another characteristic that could be hurting millennials financially is not caring about credit. Millennials are less aware of their credit standing and place less importance on it than previous generations, a 2017 survey by Discover found. However, it’s a mistake to not keep tabs on your credit. Your credit score matters because lenders use it when deciding whether to give you a loan or credit card, landlords likely use it when deciding whether to rent you an apartment and even mobile phone providers might check it when deciding whether to offer you deals.

“The most important thing younger consumers can do is become aware of their credit standing early, and stay on top of it by checking their score frequently,” said Ryan Scully, Discover Financial Services’ senior vice president of brand, media and insights. You can check your FICO score, which is commonly used by lenders, for free with Discover Credit Scorecard. You also can get a free version of your credit score on GOFreeCredit.com.


Not Using Credit at All


Some millennials make the mistake of not using credit at all. “It’s beneficial for consumers to have a healthy mix of credit, either through responsibly managed credit cards or loans,” Scully said. That’s because 10 percent of your FICO score is based on the mix of credit you have, according to myFICO.

How long you’ve had credit is another factor in FICO scores. Even more important to your score, however, is credit payment history — whether you’ve regularly made on-time payments. Using a credit card responsibly, or paying off everything you charge each month, might help you build your credit and improve your credit score.


Thinking You Have Time to Save for Retirement Later


Millennials’ saving habits could use improvement. A recent GOBankingRates survey found that 57 percent of millennials have less than $10,000 saved for retirement.

“Saving for retirement isn’t exactly the sexiest thing in the world when you’re young,” said Clint Haynes, a certified financial planner and president of NextGen Wealth, which serves the Kansas City, Mo., area. “Most of us are much more concerned about experiences and having fun — and for many, paying off student loan debt.”

But thinking you have plenty of time to save for retirement later can be a mistake. For example, to save $1 million for retirement, you’d have to set aside nearly twice as much each month if you started saving at 35 rather than 25 — assuming a 6 percent annual return. So, don’t wait.

“The worst thing that could happen is you get to quit working earlier than you expected,” Haynes said. “Now, that’s not so bad.”


Being Afraid of Investing


Millennials need to get into the habit of investing. “A common barrier for millennials is that many don’t feel they know enough to invest, which is holding them back from getting started,” said Rich Hagen, president of Ally Invest.

You might be afraid of losing your money in the stock market, but you’re putting yourself at risk of not having enough money for retirement if you put your money in a savings account with a paltry return. Your money likely won’t grow at a fast enough rate to keep up with inflation — it’s a money trap to avoid.

To get over your fear of investing, Hagen said you can take the mystery out of the process by reading articles or watching videos to educate yourself. When you do invest, make sure you don’t put all of your money into one stock. Consider low-cost index funds that track the performance of major stock market indexes.


Rushing Into Investing


Although some millennials fall into the trap of not investing, others rush into it too early, Boneparth said. It’s great to save for retirement, but you need to make sure you’ve covered some other important financial bases before you start investing a lot of money.

For example, if you have limited funds and are just starting out, make building an emergency fund a priority, Boneparth said. Also, if you have a lot of high-interest consumer debt, focus on getting rid of that. “Many will say invest early and often,” he said. “But if you can barely pay bills, you might need that money.”


Falling for Scams


Millennials might fall into the trap of thinking that they won’t ever get scammed. But, in reality, they are more vulnerable to scams than older generations, said Doria Lavagnino, president of CentSai, a financial wellness platform for millennials. Nearly 70 percent of scam victims are under the age of 45, the Better Business Bureau reported in 2017.

Millennials are more likely to be victims because they are the first generation to do most of their transactions online, Lavagnino said. Plus, they’re often more comfortable with providing personal details over social media.

To reduce your risk of becoming a scam victim, Lavagnino recommended creating passwords that have a combination of letters, numbers and characters, and changing them every three months. Don’t use public WiFi to check financial accounts, and scan your bills and accounts monthly for unusual charges. Also, check your credit report once a year to see if there are any accounts you didn’t open, which could be a sign of fraud.

“These are very commonsense steps that can make a big difference,” she said.


Spending More Time on Social Media Than on Your Finances


Americans spend more than twice as much time on social media each week than on their finances, a GOBankingRates survey found in 2017. The survey also found that millennials spend more time on social media than previous generations — and they do so at the expense of their finances.

Social media can have other negative effects on your finances, aside from just consuming time you could be using to manage your money. Seeing your friends post pictures of all the fun things they’re doing might make you feel pressured to spend more to keep up with them, Boneparth said.

“Sometimes you have to put the blinders on,” he said. “Think about what you’ll be able to do if you stay on track.”

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Finance Magazine: Millennial Money Traps and How to Avoid Them
Millennial Money Traps and How to Avoid Them
Here's how to avoid these money mistakes anyone could make.
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