BasicsSavings&Banking

4 Costly Financial Mistakes That Millennials Are Making In 2021

We know, another article about what millennials are doing wrong in today’s economy, what a shocker.

Our aim here isn’t to berate, but instead — to educate and raise self-awareness about day-to-day millennial financial habits that you might not even be aware of, many of which might be holding your finances back.

Contrary to the cliche proclamations and stereotypes put forward from older generations, the financial woes of millennials are not because we are lazy or financially illiterate.

Here’s the thing.

Millennials have unfortunately been born into an economically precarious time.

In fact, millennials deserve a round of applause for being able to survive in a society where their shot at a middle-class existence has dissolved, replaced by an economic system that favours the already-wealthy.

“Statistics have showed the incomes of the richest fifth of UK households grew by 4.7 per cent last year – while the incomes of the poorest fifth of households fell by 1.6 per cent.”

(Source: The Independent)

On top of that:

“The figures for the financial year 2017-18 revealed disposable incomes to be stagnating at a median of £28,400, the same level as the previous year. The office for national statistics (ONS) said that “despite the small increase, income inequality remains slightly lower than levels reached 11 years ago”

Source: The Independent

Across the pond, things don’t look so great for millennials, either.

Source: How the taxes on the wealthy have fallen over the past 70 years (USA)

According to many analysts, millennials are expected to be the first generation in human history to be, on average, less wealthy than their parent generation.

Many developed countries have seen average life expectancies begin to decline from historically high growth rates as well as historically high levels of economic inequality.

That being said, it does not mean that millennials are not committing mistakes detrimental to their overall financial health.

Unfortunately, the old strategy of gaining wealth is a relic of a bygone era.

Traditional knowledge to achieve financial security just won’t cut it in today’s highly technological and mobile economy.

What worked for their parents won’t necessarily work for us millennials, so we need a new framework for how to achieve financial health and wellness.

With that in mind, we are going to cover 4 of the biggest financial mistakes millennials are making in today’s economy. Ready?

4 Big Financial Mistakes Millennials Are Making

1. Avoiding Credit

Most millennials experienced the 2008 global financial recession right as they were entering adulthood, and that has greatly affected the views of utilizing credit.

According to one study, approximately 42% of UK millennials report that credit cards are among their biggest financial concerns and many have been scared off using credit completely.

No doubt in such economically precarious times, the idea of living off money you do not currently have is anxiety-inducing, but properly managing credit is necessary for good financial health.

You need a good credit score to take out loans and qualify for credit programs.

So, millennials are recommended to try to find a low-interest credit card and keep a low balance on it each month.

Doing so will help you build your credit. For example, consider picking up a card that you solely use to pay utility bills which you instantly turn around and pay off.

2. Saving instead of investing

The 2008 financial recession has put a sour taste in millennials’ mouths with regards to investing. The result of this has been a very “conservative” mindset to growing one’s wealth — rather than investing as a means to secure a financial future, many millennials in the UK are instead focused on saving.

While saving is no doubt a smart financial decision to make in general, pouring all your extra funds into a 0.5% savings account rather than trying to turn that into more wealth will hurt you in the long run.

Even with a high-interest savings account, at best, you’d only be protecting your finances from inflation, and not really growing your money at all.

Here is an example: Say you work for 30 years and manage to save £2,000 a month. Assuming that stays consistent, that comes out to just over £700,000. At a £70k per year lifestyle, that will last you only 10 years into your retirement. And that’s not even including adjustments for inflation.

Now imagine the same scenario with investing.

Say you invest that £2,000 a month and continually invest the funds you receive in dividends. At an average return rate of 7%, that amounts to over £16 million over the same period, and that is not even counting the dividends you get from your securities.

So while saving seems like a solution to an immediate problem, it ultimately puts an upper limit on your total financial potential.

According to research from Forbes, millennials have less financial knowledge than older generations and are more likely to consider themselves conservative investors.

Again, millennials are likely averse to risky investing due to their experiences watching the global stock market crash.

But here’s the important caveat: even those who “bought and held”, and were able to ride out the recession, ultimately came out on top once things stabilized.

Investing is one of the best methods for long term growth and many millennials are just not taking advantage of the overall positive trend of the economy.

3. Not Buying Homes

This is another thing that millennials are constantly chastised for doing “wrong,” but in many cases, it is beyond our control.

The housing market is abysmal for millennials and low wages and stagnant growth contribute to the problem.

Fortunately, things seem to be improving.

The British government offers several schemes for first-time home-buyers that can help millennials get their foot in the door in the property market.

For example, under an equity loan scheme, first-time buyers can borrow up to 20% of the purchase price interest-free for 20 years with as little as a 5% deposit.

In London, you can borrow up to 40% of the purchasing price. Shared equity schemes allow you to own a portion of your home with the potential to buy back more when you have the funds.

We understand that the housing market is inherently prone to ups and downs, and many analysts warn that the impending Brexit will negatively affect property values in the immediate future.

However, looking at the grand scheme of things, real estate investments, if they are an option for you — are almost always a solid financial investment.

A recent study from UC-Davis analyzed financial records of 16 wealthy countries over the past 150 years and found that real estate investments generated an average 7% return over that time frame while securities investments made an average of a little less than 7%

Yep — you read that correctly; it seems that over the past 150 years real estate investments have produced better returns than the stock market.

So if you are a millennial and are nervous about investing in some property, know that you have history on your side.

4. Lifestyle Creep

“Lifestyle creep” refers to increasing your spending as your earnings go up. As millennials work more and advanced in their careers, they often find themselves spending more simply because they have more money to spend

To be fair, lifestyle creep is not something unique to millennials and has been seen in every generation, but in today’s heavily consumer-oriented economy, there is huge social pressure for millennials to spend extra money on a new smart TV or that expensive PC.

To be clear, there is nothing wrong with having nice things and saving to buy some luxuries.

After all, life would be pretty dreary if you lived in a dull shack and ate beans on toast every day, even if you would be saving a ton of money.

Rather, avoiding lifestyle creep just means making sure you don’t spend just because you can. There is nothing wrong with having a nice apartment, just don’t plan on upgrading your apartment simply because you got a raise. Don’t take your tax return and blow it on an exorbitant vacation. Avoiding lifestyle creep will give you more money to save and invest in future projects.

So, What Are Millennials Good At?

Rather than have this piece as purely another millennial bashing article, here are some economic measures where millennials are doing very well, compared to older generations.

Education

Above all, millennials are probably the most highly educated workforce the world has ever seen.

According to research from Pew Social Trends, approximately 40% of Millennials have at least a bachelor’s degree, compared to a quarter of Boomers and only 15% of the Silent Generation (1928-1945).

Education is a major factor that determines economic outcomes and, while the connection between education and economic wellbeing is not as strong as it used to be, getting an education is still one of the best things you can do to improve your financial future.

Millennials tend to take their education very seriously and so are in a good position to increase their economic standing.

Again, the trope of the lazy thin-skinned millennial is absolutely false. Millennials as a whole are smart and highly motivated, they just do not have the proper economic environment to make good on these metrics.

Tech Savvy

As they grew up during the dot.com explosion of the early 2000s, millennials are keenly competent with technology and are much more likely than older generations to adopt new technologies.

The economic benefits of this tech-preponderance may not be immediately obvious, but tech-savvy millennials are uniquely positioned to succeed in today’s digital and informational economy.

From simple things like knowing how to use computers to being more likely to hop onto new technological trends, millennials are projected to make great strides in the technological sector in the coming years.

Tolerance and Diversity

Lastly, millennials are much more tolerant and welcoming of ethnic, sexual, religious, and cultural diversity than previous generations.

It is a well-known fact that a diverse culture facilitates large economic growth.

In fact, some of the richest and most economically important cities in history, such as Istanbul or Rome, were economic powerhouses in part because of their diverse cultures which saw great opportunities for the transmission and flow of ideas.

To put the point simply, diversity encourages economic growth while homogeneity slows it down.

Millennials’ desire for diversity is a good sign that they are on the right track for implementing policies that are conducive to overall economic health and prosperity.

Final Thoughts

We won’t sugar coat it: millennials arguably have it much harder than their parents in a lot of areas through no fault of their own.

Instead of chiding millennials for failing to live up to the sage economic advice of a time that no longer exists, perhaps we should encourage millennials instead to focus on cultivating habits that are conducive to our new global economy.

Tom
About author

Fully qualified CISI Investment adviser for 5 year. Managed UK private client portfolios.
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