The 5 Most Common Financial Pitfalls for Millennials
Money is a one of the top stressors in many people's lives. There are many reasons behind it and often times it can be avoidable. Sometimes all it takes is avoiding the common pitfalls that people run into. Fortunately for you, there have been many people who have gone through these so that you don't have to. What I'll share are the 5 most common financial pitfalls every Millennial can avoid:
1. Taking on too much debt
The most common debts for Millennials are credit card debt, student loans, and mortgages. I will quickly touch up on all three of these debts.
Student loans are important for helping you progress in your professional life. If you're thinking about taking out student loans, you want to make sure you assess what program you're taking and making sure it's the right program for you. A common pitfall is taking on student loans without being clear of why they're going back to school. Often times people spend years in school to find out that it isn't the path for them. At that point, years have gone by and thousands of dollars of debt have been taken on for no reason. Be clear with what path you want to take, what education you really need, and learn what it's like after school to see if it's the right career path for you.
In regard to mortgages, it is very attractive to take on a mortgage to purchase property. Real estate will always be in people's minds. When people find a property they like, they try at all costs to own that property. This means taking on a mortgage that they might not be able to afford or sustain. Fortunately, in Canada, our lending regulations have been more and more strict over the past couple of years. However, many people can still find ways to get approved for mortgages beyond what they're capable of keeping up with. There's nothing wrong with that, but many people underestimate the financial implications that come with a mortgage.
The costs can rise as interests go up and a payment you thought would be affordable becomes very hard to sustain. You may end up becoming a slave to the bank and work for 25 years just to keep up your mortgage payments. You want to make sure that the mortgage you're taking on is one that is within your means. As you start overextending, you start losing control of your cashflow.
The biggest one I want to emphasize is taking on too much credit card debt. The reason is quite simple. We spend more than we make. A big part of there is a lot of societal pressure to put up a front of having nice clothes, a nice car, eating lavishly, partying, and travelling. You can spend thousands of dollars you don't have just to hold up a façade. The problem with this is that sooner or later, your debts will catch up to you and it becomes a hurdle that is very hard to overcome. Make sure you spend less than what you earn. Don't feel pressured to "keep up with the Joneses." Make the conscious choice to be well off financially instead of looking like you're well off financially.
If you've already built up some credit card debt, make sure you cut up your credit card. Use cash or your debit card. Make payments above the minimum and have a plan in place to repay it as soon as possible. Because the interest rates are so high, it can be a burden that you carry for a long time if you don't become proactive about it.
2. Lack of Balance
With finances, there is always a balance between spending today and saving for the future. It is a spectrum, and there is no perfect balance. How much you allocate to either one depends on your situation. But often times, you can go too far onto one side of the spectrum and be imbalanced.
If you're spending all of your money on eating out and partying, and don't have any money for anything beyond next month's rent, you might be out of balance. You might miss many financial opportunities in life if you're too focused on today. You miss out on many of life's pleasures (ex. - home ownership, building a business, travel, retirement) that come with saving. With time on your side, saving early is an instrumental part to getting ahead. It's one of those things that we all hear about, but don't realize until it's too late.
If you're saving all your money and won't spend a dollar for yourself, you might also be out of balance. When you save to the point of depriving yourself from spending at all, you could forget to enjoy the present. You might hope that the future money will bring you happiness and forget to live life today. You want to be clear about why you're saving and making sure it's for a reason that will make you happy. You can't bring your money with you into your grave, so you want to make sure you use it for something worthwhile now or in the future.
Reflect on what is it you want in your life and find your own balance. Maybe right now you need to save a lot because you have ambitious goals, then later in life you want to spend more and travel more. It will all depend on your stage in life and what's important to you in the moment.
3. Not Taking Risks
A key investing principle is that your returns match the amount of risk you're willing to take. And often times, it's recommended to take on higher risks if you're young. This is because you have a long time horizon before you need your money and you can stomach the short term fluctuations because you don't need it right away. If you choose a safe investment, such as a treasury bond or GIC in your 20's, you end up losing money in the long run because you earn less than inflation.
This advice carries over to every other area of life, as well. When it comes to your career, your business, your passions, your relationships, you want to take risks. If you want to approach someone attractive, you have to take the risk of getting rejected. If you want to pursue your passion in painting, you have to take the risk of failing. The same with starting a business.
You don't need to have life figured out in your 20's and 30's. You won't. But it's important to take risks to do the things that you really want to do. You don't want to look back when you're 60 and regret not taking the chance and live with "what if." It's important as it plays big role in your financial plan and how to structure your goals, investments, budgets, and action plan.
4. Not Communicating About your Finances
This ties into the first pitfall about taking on too much debt. Now, more than ever, we live in a time where we need to maintain the lifestyle of those around us. We pretend to have our finances in order when we don't necessarily do. Especially because money has become such a taboo topic, it's the last thing people want to talk about when they're not in a comfortable situation.
One of the reasons you can get stuck is because you're unable to communicate to yourself and those important to you your situation. If you're struggling financially, getting support and reaching out will be a crucial first step. Unfortunately, many people are ashamed of their situation and are afraid to ask for help. You need to realize that you're not the only one in that situation. That there are so many people around you with the same struggles, and that accepting it and asking for help is the big first step.
This is especially important when you have a spouse/partner who you share finances with. Even if you keep your finances separate, you want to be able to communicate with each other the situation you're in. It removes a lot of the tension within the family about finances. Working together creates an opportunity to fix the problem, as opposed to complaining and arguing.
5. Lacking far-sightedness
This is similar to the second point about being imbalanced with your finances. When you only think about your next month's rent, or what you're going to do this weekend, and where you want to travel this year, you can miss the bigger picture. You want to think ahead and ask yourself, "What would my future self 30/40 years from now thank me for doing today?" When you ask yourself that question, you start realizing what's important to you. You might realize that some of the things you're doing today isn't aligned with what you value. You might be unaligned with what you say you want and what you're doing.
Financial success comes from doing the right habits again and again. Some of these include saving regularly, investing long-term, budgeting, planning for risks, and always planning ahead. The reason that Millennials miss the opportunity to reach financial success sooner is that they don't think far-sighted enough to realize the importance of all these habits. Once you have a vision for the life you want to create, it becomes much easier to implement and maintain these habits.
Again, avoiding these common pitfalls will help ensure you reach your short-term and long-term goals. More importantly, it will help you focus your time, energy, and money on the things that are important to you. Keep these in mind as you're creating a financial plan. In doing so, instead of dealing with stress, you can feel confident and with peace of mind.