5 mistakes millennials make when building their financial lives

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The road to financial independence is not easy, and patience and diligence are usually required early on.

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

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

Thanks to compound interest, even small amounts of savings grow significantly over a longer period 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 rate of return 5%. Meanwhile, if you wait until age 35 to start saving $100 a month, you’ll have a little more half as much money at retirement age.

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

In a recent report from Natixis, 60% of respondents said they would have to work longer than expected to retire, and 40% said it would “take a miracle” for them to be able to. retire securely.

“Some people delay contributing to retirement 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 have to play or plan for later retirement,” said Jay Lee, a certified financial planner at Ballaster Financial.

One mistake younger workers often make is not taking full advantage of their 401(k). Although retirement may seem far away, investing in a tax-advantaged retirement savings plan like a 401(k) can provide more opportunity to achieve other financial goals.

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

“Many employers match contributions to a 401(k), which means that a large increase can significantly increase the money in your account,” Lee said, “And because the contribution to a 401(k) is tax-deductible, it can leaving you with more money to invest or spend. ”

In addition to a traditional 401(k), financial planners also encourage young adults to explore other options that may be more suitable for them, such as a Roth 401(k), which does not offer a tax advantage before -hand, but is tax-free when withdrawn. in retirement.

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

“Lifestyle inflation” or “lifestyle inflation” occurs when people begin to see former luxuries as necessities.

“Social media creates a desire to keep up with other people,” said Nick Reilly, a certified financial planner based in Seattle. “The fear of missing out, combined with an ‘I’ve earned it’ mentality, has led to more Millennials spending the majority of their income on things that provide fulfillment and short-term 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 rather than a building with elevators may not feel that different when you’re young, but it can save a lot of money,” Watson said. He recommends keeping rent under 25% of your gross monthly income and food costs under 15%.

Emergency cash can save the day if you lose your job, get too sick to work, or have other unexpected bills. However, young people can sometimes be overconfident and ignore these dangers.

“It’s not surprising to see young adults without emergency cash at all,” Lee said, “which is a concern because it’s an important financial buffer and prevents you from getting any further.” the debt ”

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

Although newer investments such as NFTs, meme stocks, SPACs, and cryptocurrencies offer attractive growth potential, overlooking the volatility may pose a serious risk to your financial health.

“Thanks to social media, chances are 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 and volatile investments are increasingly attractive to younger investors looking to build quick wealth, and can make long-term, more established methods of wealth building, such as stocks, look boring.

“But it’s incredibly risky to put all your money into high-risk assets like NFTs or cryptocurrencies,” Watson said, “When it comes to financial planning, it’s more about preparing for the worst than running the highest output. ”

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