Millennials are the people born between years 1981 and 1996. They are also called Gen Y. It has been mentioned by the authors of the Federal Reserve paper that the millennials are financially less well off than persons from the previous generations. They have fewer assets, lower earnings, lesser wealth, which in turn affects their spending habits.
The media’s fascination with the millennials has led to many studies for the assessment of their spending habits. We will list some of the bad financial habits of millennials which they should avoid to be financially secure:
1) Not investing for the long term
Millennials are forming unwanted financial habits like turning away from investments, piling onto cash, and relying on savings instead of growth options. As per the study done by the UBS majority of them are planning for the short term as they feel that retirement is still a long way off. They prefer investing in safer instruments instead of high-risk assets.
2) Spending more than you earn
Your financial health is dependent on how much you earn, spend and then ultimately save. It should be the goal of every individual to save at least 20% of the income every month. There can be a couple of unexpected expenses, or you don’t earn sufficient money to meet the expenses each month. Earning more money than you spend should be the ultimate goal. If you are unable to save more, just plan and cut down on the unnecessary expenses.
Living beyond your means is not a good idea. You have to be careful of unnecessary purchases like a new car, luxury apartment, or fancy vacations when you are trying to be financially secure and can have a good treat once a while but don’t go over budget.
3) Buying items using credit cards
There has been a survey carried out by the American Institute of Certified Accountants, which concluded that more than three-quarters of millennials prefer buying cars, devices, and clothes that their friends already have. The habit of buying items of daily use like groceries and food using the credit card has led to many problems like late payment and dependence on parents for more than 25% of the millennials.
4) Not tracking the spending
The problem of this overspending arises when people don’t plan and track their budget and go ahead with impulsive purchases. The best way to avoid this overspending habit is to stick to a budget. The budget includes necessities like utilities, groceries, insurance, housing, and in the end, if the budget allows, money can be spent on entertainment. There is various budgeting software available:
· Best for couples: Honeydew
· Best for College Students: PocketGuard
· Best for Families: EveryDollar
· Best for Investors: Personal Capital
· Best for Saving: Albert
· Best for Beginners: Mint
· Best Overall: You need a Budget.
After you have prepared a budget, the best thing to do is to ensure that you stick to it. This will help you in not going over budget and will lead you to develop a good habit to stay within your means, and you will also come to know where your hard-earned money is going.
5) Overdrawing a bank account
This is a big issue. Many people make purchases on the weekend on a debit card which may not post until Monday. When people don’t track their spending carefully, they think that their balance is higher, and they tend to overdraw their accounts. The data from Consumer Financial Protection Bureau says that one in ten millennials overdraft more than ten times a year, which adds to a good overdraft fee.
6) Making late payments and not clearing credit card payments
When you are not saving enough, it can be tempting to put expenses on a credit card. While credit cards provide flexibility and reward redemption, they can turn into a debt burden if you are not careful.
When you are new to personal finance, it is quite a common mistake to make a late payment. This comes with additional late fees and interest, and when there is a history of late payments, it can lower your credit score.
Research by Experian(business data, analytics, and marketing services)found that millennials are more than twice as likely to pay their credit card bills late compared to the baby boomers.
You should try to pay off your balance each month in full to avoid accumulating interest and building up debt.
7) Spending too much on rent
A recent Rent.com survey of 1000 millennial renters between the ages of 18 to 34 years found that over half of the people surveyed were spending more than the suggested 30% of their income on rent, and nearly one in five were spending more than half of their income on rent each year.
8) Not building an emergency fund
It is always good to build an emergency fund that you can use in case of an emergency. As you get into a habit of preparing a budget and tracking it every month, the next thing you should do is put a certain amount of money in the emergency fund. A minimum of three to six months of expenses should be there in the emergency fund.
9) Not saving for retirement
Most people think that retirement is too far away into the future so why worry about it now and enjoy life. They want to spend lavishly on the present, and when they age, it is too late to save anything substantial.
A bank rate survey found that 69% of the people up to the age of 29 years had no retirement savings at all.
What you should do is once you have taken charge of your budget and stashed enough money for the emergency fund, the next step should be to save for retirement. If your employer offers retirement contributions, you should contribute to it from your side. When your employer doesn’t offer retirement savings options, you can contribute to a traditional or Roth IRA.
10) Buying everything new
It is natural to buy new things. Everyone gets excited about buying new items like clothes, household items, or even a car. But there are cheaper options available as well. You have many options like going to Craigslist, yard sales, or the thrift stores for finding cheaper items. You may not find everything you need, but you can definitely check your options before buying new items.
11) Not studying about financial products
To succeed in life, you have to be good at managing your finances. Knowing well about personal finance helps in making educated decisions where the money is involved. You may get a recommendation from a family member or a friend or see an ad but always resist the urge to purchase immediately. When it comes to credit cards, loans, and bank accounts, always compare different financial products and go with the best possible deal.
12) Not investing in insurance
Many people are tempted not to go for insurance cover, but this could lead to a bad financial situation when you need money the most. You should always invest in Life insurance, health insurance, auto insurance, home insurance and ensure that you are covered for the emergency.
13) Too many subscriptions
There are many subscription services available nowadays from TV channels, Netflix, and various other things. You may sign up for a few of the available subscriptions as they cost a few dollars each month and forget about them, but they may add up to a substantial amount.
A way to check and reduce the subscriptions is to monitor your bank statement every month and only keep the ones that are truly worth keeping. If you don’t want to do this, you can set up an account with ‘Trim,’ which will help you to clear unused subscriptions.
Millennials are understood to be a confused generation. They want to enjoy life’s luxuries, looking for flexible work schedules. Travel loans are a new concept, but before taking a new loan, they should ponder if they have an emergency fund in place.
They are more independent and have fewer responsibilities towards families than the previous generation. They should make correct decisions to become financially independent. A look at the reality suggests that they still have a long way to go in bringing the financial habits in line with what the future should look like.