The Top Financial Mistakes That Millennials Make

Most Common Financial Mistakes Millennials Make

The road to financial independence can often be volatile and exasperating – though millennials seem to have the greatest difficulty compared to the generations that preceded them. Everyone has financial desires and dreams, but most of the time, the ideas go from one lily pad to the next, with little thought given to the actual planning process.   

But with greater awareness and acuity, financial mistakes are a window into future success, and undoubtedly a learning experience that is ingrained the more they are encountered. Securing the reigns of a financially prosperous future is the culmination of these mistakes, and teaching others to avoid the common pitfalls. Here are some of the worst financial mistakes millennials often make.

1. Impulse Purchases

We live in an era when consumerism is not only at its peak, but is too easily accessible. Making a purchase is just one click or swipe away, whether on Amazon, DoorDash, Lululemon, eBay, and countless others. Wanting less seems more counterintuitive than ever, and needs are often the estranged category left behind.

Millennials don’t put many barriers in front of those impulse purchases, and it tends to hamper the funds available for saving and investing. In 2020, at the beginning of the COVID-19 pandemic, impulse spending was increased by 18% - a fairly significant rise, considering the level of uncertainty ahead.  

When things were most grim, many people turned to retail therapy as a means to cope with the layoffs and endless stressors of the pandemic. But consequently, it became a cycle of more overspending, borrowing, and an increase in overall debt loads.

2. A Lack of Budgeting

Budgeting is at best an afterthought, and at worst never done! Millennials are not the only ones ignoring this coveted financial fundamental. In fact, many Americans don’t know how much they spend on a regular or monthly basis. Establishing a budget is the gateway to spending with purpose, and is one of the best tools in personal finance. While millennials do their best to create budgets, they tend to create unrealistic ones, trying to sprint before they can walk. Some even tighten the belt really early and amplify their savings rate to a personally unsustainable level, leading to failed plans and a cycle of binge spending. Setting a primary focus on needs such as rent, groceries, health insurance, debt, and transportation before channeling wants and desires is a winning recipe, but requires regular practice and accountability.

One piece of advice is to create a friendlier budget that isn’t so restrictive. Set aside “fun dollars” that are meant for enjoyment and freedom. It is absolutely healthy to have some level of guilt free spending.

Always revisit and review, changing your budget based on your requirements and individual goals. Life isn’t static, so there’s no reason why you should think that your income is. Pull the different levers of budgeting, investing, and spending as income fluctuations occur. A budget should be created around one’s cash flow – not the other way around. It may take some time before you find the perfect ratio of saving and spending, so don’t be too hard on yourself. Patience is key! 

3. Not Saving Enough

When it comes to savings, there are several things that millennials could certainly do better. For one, many people don’t start saving early or when they should: Before an emergency. It is critical to be proactive rather than reactive in these instances because an inordinate number of Americans are still living from paycheck to paycheck, scrambling to even find $400 for a pressing emergency. People create their own jails, falling into the psychological trap of “I’ll save when I can,” effectively procrastinating until the point of emergency. Over time, costs and expenses tend to rise and the difficulty of saving becomes even more overwhelming.

With the two generous rounds of government stimulus, millennials have been spending their tax refunds on additional wants, desires, and even stocks. Instead of addressing more prominent needs or establishing an emergency fund, they are postponing stability and finding a haven amongst ‘meme stocks.’ Do not buy stocks with your tax refund or stimulus checks until you have consistent stability.  

Millennials also make the mistake of not saving for retirement, missing out on many years of compound interest. It might not seem like a big deal now, but it’s a mistake that will likely haunt you in the future. Reports show that one-third of millennials even make early withdrawals from their 401(k) plans so that they can pay for vacations, big purchases, or extravagant personal expenses. Avoid the need to keep up with the Joneses at all costs!

4. Not Investing

While we might tend to think that the last few years and especially the last decade have been the golden years of investing, statistics reveal that this is not the case – at least for many millennials who have steered clear of the markets out of fear for years. Between 2017 and 2018, only around 37% of Americans under 35 owned stocks. This is in sharp contrast with the 61% of people past 35 that have also owned stocks.

Indeed, opening an investment account does come with a few risks, and you cannot expect the market to always go in your favor, especially in the short term. Even in spite of this, millennials still have one thing that they can control: The amount of money that they save and invest.

Most people want instant gratification, and the America culture does not disable this by any means, but by simply putting a small percentage of your earnings in long-term investments, you are able to reap the exponential rewards of compounding. It would serve millennials well to hone this skill consistently.

5. Borrowing Too Much

Nowadays, borrowing is as natural as breathing and enables people to make a big purchase today, even if they are lacking the funds and means to pay it off later. The problem is that millennials are indiscriminately buying houses and cars that are too expensive, beyond their income limits, and they do it sooner than they are actually ready.

Maxing out the borrowing of your student loans to supplement your lifestyle? Do not do this unless you have a very nice friend or family member who is going to cover this irreversible decision.

Before taking on a large loan or undergoing hard inquiries for new credit cards, review your current financials and make sure that you can reasonably handle the monthly costs, including interest, fees, and any potential penalties. Minimize the stretch of borrowing from your budget. We live in times of ultra-low interest rates where you can easily buy a home for the promise of equity, but don’t let this fool you into overspending and reaching beyond your means. The house that you buy now does not have to be your dream home. Take the incremental steps required to build up to a purchase that you can accommodate without going underwater with your options.

6. Ignoring Insurance

According to New York Life, only 10% of the millennials have life insurance – a reality that can create real hardships in families where dependents rely on the income of sole breadwinners. In the event of an untimely death, the surviving spouse would be left alone to deal with costly expenses such as paying off a mortgage, car loan, health expenses, unexpected repairs, education, or supporting children and family members.  

Considering a replacement income or nest egg is a wise and proactive decision. We can never truly predict a black swan event that carries catastrophic consequences, but we can certainly prepare for it.

7. Credit Card Overuse

Credit cards are great tools for building credit, making larger purchases, and pursuing new opportunities if they are used responsibly. They are irresistibly convenient to use, and accordingly lead to overspending and misuse. Spending 20% to 30% more annually while carrying plastic versus cash is no surprise. The instinctual aversion to loss is removed when you carry a credit card.

With our innate protective barrier removed, it becomes harder to rely on sheer willpower. One helpful rule for credit cards is to not rely on them to pay off daily necessities, until you have a firm grasp on your spending habits. It also does not hurt to give yourself some wiggle room. Give yourself an additional 10% to 20% of extra spend so that you don’t feel so constrained. Congratulate yourself when you’re able to stay under your credit card spending budgets. Maintain your focus on needs and keep your credit cards tucked away when you find yourself wanting extra! Credit card debt piles up quickly, and the interest rates are very difficult to keep under control when they get out of hand.

The Bottom Line

Financial mistakes are very common in an environment where these skills are not formally taught, nor are they ever openly discussed. These are some of the common pitfalls that many millennials face today, but there will always be situations and circumstances that breed even tougher decisions. Fail fast and fail often, but keep your mistakes from becoming catastrophic. Choose a few areas where you want to improve most over the next 6 months or year. Give yourself a well-defined plan and a deadline. Your financial competence will only get better with time.