The 3 BIG Financial Mistakes Millennials Are Making—And How You Can Avoid Them.
From one millennial to another.
A recent survey of financial health in the US showed that millennials — now in their mid-20s to 40s — are struggling to get ahead.
Specifically, more than half of top-earning millennials have little money left at the end of the month. In other words — they’re living paycheck-to-paycheck. They aren’t struggling to make ends meet, but they’re struggling to get ahead.
Let’s dive into the 3 big financial mistakes millennials are making and explore what you can do to avoid them.
1. Waiting too long to start saving for retirement.
There’s no way around it: the sooner you start saving for retirement, the easier it is.
Alternatively, the longer you delay, the more difficult it becomes to meet your retirement goals. That’s because of the powerful effect of compounding over long periods. Compounding is earning interest on your interest, and the benefits can be staggering.
Consider that delaying just 10 years can mean the difference between having $800k for retirement and having just over $2 million — a 1.5x increase. (Assuming savings of $500/month, a 9% return, and comparing a 30-year and 40-year savings timeline.)
But, there’s no way to go back and start earlier, so focus on what you can control moving forward.
The single biggest change you can make is to start investing for retirement today. Don’t delay one more day, week, month, or year. Too many people kick the can down the road one more month, only to look back and wonder where the years have gone.
It doesn’t matter the amount. Just get started saving for retirement.
2. Keeping up with the Joneses.
“Modern capitalism is a pro at two things: generating wealth and generating envy. Perhaps they go hand in hand; wanting to surpass your peers can be the fuel of hard work. But life isn’t any fun without a sense of enough. Happiness, as it’s said, is just results minus expectations.”
— Morgan Housel. The Psychology of Money
Like it or not, humans are wired to compare.
It’s how we make sense of the world, constantly evaluating haves and have-nots, comparing our lives to those around us. But, back in the day, social circles were much smaller. Generations before us may have only compared their lifestyle to those in their neighborhood, community, or office.
Now, with social media, we have a constant highlight reel feed of people from all walks of life.
This can make us feel like we are lacking, no matter how much we have. Because at the end of the day, there will always be someone who has more. This highlight reel of comparison, combined with hedonic adaptation — a psychological phenomenon that fuels our desire for more, can be a destructive combination for your money and, frankly, your happiness.
Instead of keeping up with the Joneses, it’s time to define what’s enough for you.
Enough to me is going to be different than enough to you, but here are some of my thoughts: If you can decide what level of spending and savings will allow you to reach your financial goals, you can work backward to determine what level of income you need to support that. Anything above that income level becomes a deliberate choice to trade your time for money.
You get to decide how much money that is, with the important thing being that you make a conscious decision.
And while there’s nothing wrong with spending money, it’s critical to spend it on things that are important to you. There’s a big difference between buying a Tesla because that’s important to you and buying a Tesla because that’s what people around you are doing.
The former is a decision to align your spending with your values, and the latter is simply another spin on the hamster wheel.
3. Overcommitting to speculative assets like crypto or private equity.
Last but not least, many millennials are overcommitting to speculative assets.
I understand the rationale — many millennials feel behind financially, and they think they need to swing for the fences to catch up. But unfortunately, this all-or-nothing play faces a greater chance of failure than success. There’s a small chance you end up with a lot, and a big chance you end up with nothing.
Instead, let’s approach the problem with a clear plan for success.
Everyone’s situation is unique, but my goal with investing is to give myself the highest probability of success. And as best-selling personal finance author Morgan Housel writes:
“Every investor should pick a strategy that has the highest odds of successfully meeting their goals. And I think for most investors, dollar-cost averaging into a low-cost index fund will provide the highest odds of long-term success.”
It’s not sexy, but it works.
Instead of swinging for the fences, pick an investment strategy with the highest probability of success. Then, if you want, add a modest exposure to more speculative assets like private equity and cryptocurrency. I limit my exposure to speculative assets like cryptocurrency to 5–10% of my total investment portfolio, but you decide what works for you.
As a generation, millennials have faced a series of unique financial events at critical stages of our lives.
Many of us graduated high school and college during the great recession and housing crisis of 2009. We’ve been saddled with student debt as college costs have grown significantly over the past few decades. In addition, we have been struggling to buy homes and start a family amidst the recent rise in housing prices and the global pandemic that brought extreme financial uncertainty.
But while these last 20 years of economic turmoil have undoubtedly impacted our generation’s ability to get ahead financially, it’s our time to take control of our financial lives, one step at a time.
