Serious Money Mistakes Most Millennials Make (and How to Avoid Them)
How often do you take a moment to consider your finances for the future? It’s ok if the answer is never. While there isn’t a SkimmAhead notification built into your Google calendar for when you should start investing or saving, your actions now can severely affect your future financial stability. Two words: compounding interest. If you don’t know what that is, keep reading.
Even if you’ve just graduated from university and are grappling with student debt, financial experts say you’re never too young (or too old!) to pause, take stock of your situation, and draft a game plan. To set us on the right track, we asked Megan Speeth, vice president at Fidelity Investments Berkeley Investor Centre, to spill about the most common money mistakes she sees millennials make—and how to avoid them. Make sure you’re not falling into the biggest financial pitfalls in your 20s.
We’ve heard it time and time again: Everyone needs a backup fund. When you’re in your 20s, setting aside money “just in case” seems like a ludicrous suggestion, but Speeth says it should be a top priority as soon as you earn an income. “[It’s essential] no matter how old you are or what your income level is,” she says. Speeth recommends setting up a direct deposit to make it routine from an early age. “If your employer offers a direct deposit option, arrange for your bank to direct a portion of each paycheque into an account designated for saving. By carving out your savings automatically, it takes away the temptation to spend those extra dollars.” The end goal should be to have three to six months’ worth of living expenses in the bank.
If you regularly book an Uber ride, order takeaway meals, or transfer money to friends with Venmo, pause. While these apps are fast and convenient, research suggests they could derail your spending habits. A New York University study found that people are inclined to spend big when using a payment method that doesn’t involve a physical exchange of money, such as credit cards and apps. “The studies suggest that less transparent payment forms tend to be treated like ‘play money’ and are hence more easily spent or parted with,” explains study author Dr. Priya Raghubir. If you’re unsure whether to purchase an item, ask yourself, Would I be happy to hand over the cost of this item in cash? If you hesitate, sleep on it.
What is your credit rating? If you don’t know the answer, it’s time to tackle the topic once and for all. Few know this better than Adrian Deline, a 26-year-old IT specialist who discovered his credit rating had been damaged without his knowledge. “I moved house and didn’t tell my phone company about the new address. Six months later, they claimed they’d been trying to contact me about a $100 bill,” he tells MyDomaine. While it might seem insignificant, it seriously dented Deline’s credit score and could prevent him from getting a loan approved in the future. The take-home: “It’s critical to stay on top of deadlines and make payments on time to keep your good credit,” says Speeth. Check your credit report at least once a year.
It’s time to fess up: Do you have a detailed budget? If the answer is no, unfortunately you’re in the majority. A large majority of us turn a blind eye to budgeting, which could have a serious impact on their financial future. Not sure where to start? We spoke to Laura Adams, author of Smart Moves to Grow Rich, to map out a simple step-by-step budget worksheet. Print it out and fill in the gaps. You’ll feel relieved afterward—we promise.
It’s no secret millennials love to travel. While the call of adventure might be particularly hard to resist in your 20s, it’s also important to acknowledge that travelling is a major financial drain. Adams recommends building travel plans into three phase goals. Segment your goals into short-term (what you want to achieve within a year), medium-term (one to five years), and long-term plans (five-plus years). Factoring big expenses like vacations or a desire to live overseas into these plans will help inform your budget and ensure you don’t enter your 30s with fond memories but an empty bank account.
“There’s lots of research out there that shows that women are, in general, great savers, but in today’s economy, saving isn’t enough,” says Speeth. Too often, she sees women “play it safe” or feel that they don’t have enough money to see a financial planner. So when is the right age to start? Now. “It’s much easier to get started than you might think,” she says. “Consider putting just 1% of your paycheck into your company’s retirement savings plan. Then commit to increasing that percentage each year.” Speeth advises that many employers offer free investment guidance, via firms who manage their workplace savings plans. “Make sure to take advantage of these benefits, even if you save just a small amount from each paycheck.”
Overlooking out-of-service ATM fees during your 20s could cost you—big time. Other fees to be wary of include printing costs if you request monthly bank statements and phone service fees if you choose to settle a bill with a service representative, rather than online. It's important to keep track of these fees even if they seem small because in the majority of cases, they're actually unnecessary.
You’ve passed your exams, thrown your cap in the air, and left uni assignments behind for good, but there’s one legacy from your studies that lingers: student debt. If you’re carrying debt, our number one tip is to pay some of it off, on top of what is being taken from your pay. While HECS doesn't technically accrue 'interest', it does accrue 'indexation', which is a fee placed on the account per financial year. How do you avoid it? By opting to pay a small amount per year. Think of it this way: by avoiding 20 ATM fees in a year, you could put that money towards your student debt, which will see you save a lot more than that what seems like small change.
Ready to get your financial future in order? Save the checklist below and tick them off as you progress.