For most people, life in their 20s and early 30s is about experimentation, growth and making mistakes. It’s often when people learn some of their most important life lessons, and it’s no different when it comes to finances. When it comes to future planning, not everyone has it all together. There are many angles to consider, and there is plenty of conflicting information available.
One of the most important things you can do to prepare for the future is to stay informed and learn from others’ mistakes. Here are several common mistakes that Millennials are making when it comes to financial planning for the future, and practical budgeting tips to help rectify them.
1) Not contributing to a 401k or Roth IRA.
Retirement may seem like it is light-years away to someone in the prime of their life, but if they were to start contributing to a 401k or Roth IRA now, then they might be able to retire sooner and would certainly have a more secure future. Choosing between a 401k and Roth IRA is important, and it can be beneficial to have both. The main difference between the two is how they are taxed.
401k Plans: A 401k plan allows you to defer some of your paycheck to the plan. This a tax-deferred plan, which means you don’t pay any taxes until you pull your money out. Some 401k plans allow for a specified Roth designated account, which is similar to a regular 401k except for the tax treatment. With a Roth 401k, you can make after-tax contributions, which means your money can grow tax-free.
Roth IRA: The nice thing about a Roth IRA is that once you pay the after-tax dollars, you never have to pay taxes on that investment ever again. It also has fewer withdrawal restrictions than a 401k. However, if you make over a certain amount of money, you are unable to contribute funds to a Roth IRA and the yearly contribution limits are lower than a Roth 401k.
Generally, larger companies offer some kind of 401k matching system, where they will match a percentage of your contribution to your 401k plan. If your company offers a matching plan, make sure to take advantage of it.
2) Not budgeting correctly.
Often, Millennials who avoid using practical budgeting tips end up living beyond their means. A flippant approach to personal finance and a spendthrift attitude in one’s 20s and 30s can cost a whole lot more down the road when trying to buy a house or raise a family. It’s important to track your expenses and do the math to figure out what you’re spending, so that you can determine if you are breaking even or able to put away more money at the end of the month.
3) Relying too heavily on credit.
According to a study by the credit-reporting agency Experian, Millennials are struggling to pay credit card bills on time, while also having one of the highest credit utilization rates of the four generations listed.
LifeHappens means that Millennials have the highest rate of balance (what they owe) compared to their credit limit. As a result of this high utilization rate and history of late payments, Millennials have some of the worse credit scores of the four generations listed. That means trouble later on down the road when you try to apply for a loan to buy a new car or get a mortgage for your house.
4) Not building equity.
Many Millennials aren’t active homebuyers. However, you can’t build equity by renting indefinitely. The cost of renting rather than buying a home is usually higher in the long run, and in the end there is nothing permanent to be gained from renting. While it is true that many Millennials are not quite ready to settle down and buy a home, when the opportunity arises it would be a good idea to consider purchasing in order to start building equity for the future.
5) Skipping Life Insurance
Getting any type of insurance can be a daunting task, but it’s important to research the different options, even if you think it’s something you might not need just yet. Life insurance may seem like something that you don’t need to consider until you are getting on in years, but it can be beneficial to consider getting it early.
Some benefits of getting a life insurance policy early include:
- It likely costs less now. Life insurance is cheaper the healthier you are.
- The future is uncertain. It’s possible that you could develop health complications in the future that can raise your premiums or even preclude you from getting a policy all together.
- You can build cash value. If you buy permanent life insurance at an early age you can save and invest more money into the policy—the same way you might save and invest for your retirement.
- You’re protecting your family. The difference between someone dying at age 30 versus age 60 is vast. Life insurance can help replace the income of the breadwinner, which is vital for a young family.
As Millennials grow older, get married, build families and start businesses, getting life insurance becomes a more and more important part of having a sound financial plan for the future. While it may seem like life insurance wouldn’t be considered one of the practical budgeting tips, depending on your type of policy, life insurance is fairly cheap, which means there’s no excuse to why you can’t get coverage now! Here at TJ Woods, we really believe there are no hard and fast rules in the world of life insurance. We take the time to hear your concerns and learn about your individual situation.
If you are looking to determine your life insurance needs, or maybe just want to learn more about what kind of coverage is available to you, contact the agents at TJ Woods in Worcester, Massachusetts. We are experts in all things insurance and pride ourselves in hearing our clients’ needs loud and clear.
