Over the past few years of working with millennials, I’ve come to realize that there are numerous myths and misconceptions that are driving millennials behavior around money. I am not sure where these misconceptions began, but regardless, they exist.
As I began meeting with more and more millennials, I jotted down every misconception I heard with a goal of debunking them for millennials moving forward.
Here are the top 12 myths I have heard from millennials about money and wealth and why they are not true!
While it is great that you have begun saving for retirement at an early age, your 401(k) itself is probably not enough to cover your entire retirement. Fidelity Investments reports that the average 401(k) balance among its participants ages 50 to 59 was $179,100 with a median of just $62,700. Neither of those numbers are enough to retire on. It will take way more than just a 401(k) to have a comfortable retirement.
The goal is to diversify for retirement and have savings in three different buckets: Tax-deferred (401k or traditional IRA), tax-free (ROTH IRA or ROTH 401k), and then taxable (brokerage account). Saving using these three vehicles can help prepare you for the retirement you want.
This is probably the most common myth I hear. While I get the idea behind it, it is just not that simple. Renting may not allow you to build equity in a home like homeownership does, but sometimes renting is the best option. Homes come with additional costs such as taxes, maintenance, interest on a mortgage, and many other headaches you just may not want to deal with.
The truth is, there is no right answer for everyone. It depends on the city you live in, the life stage you are at, and goals you have. For some people, renting makes sense, for others, owning makes sense. Choose to buy a house because it makes sense for you and is something you truly want, not just because other people think it’s the best thing for you to do.
While this might have been true 10 years ago, it is not today. There are many advisors out there who work specifically with millennials and charge a monthly subscription fee just like your gym or cable bill. This model makes it possible for almost any millennial to get the financial help they need.
At RLS we have two separate models to help millennials depending on where they are in life. Feel free to reach out if you have any questions!
The idea behind this is great if you are someone who is swimming in high interest debt. But, if you are someone who doesn’t have any high interest debt or a minimal amount, then it is usually not in your best interest to wait until all debt is gone to start investing. If you can work on paying off debt while also investing, then do that. This strategy allows you to take advantage of compound interest and maximize your total time invested in the market.
There is no initial dollar amount required to start investing. You can begin with as little as $20 if you want to, and although that number may seem small, it can make a huge difference in your financial future. Any amount is beneficial, just get started!
A few years back I heard this quote “If all people needed was information, we would all be doctors and have a six pack.” And if you think about it, this is so true. People do not lack information, people lack the willpower to go do the things they need to do. We need accountability as humans. Financial advisors bring that accountability to peoples lives.
Additionally, advisors can help people manage their own behavior. Let’s face it, it can be hard to make rational decisions when so much emotion is involved like there is with money decisions. It’s not easy to hold onto your investments through a market downturn. It’s not easy to avoid greed investing. Having an advisor allows a 3rd party to come in and help take the emotion out of decision making.
Very few people in the world like insurance. It is not fun. It is not sexy. But…it does have its benefits. We are not invincible. Insurance exists because a large catastrophic event is too hard for people to handle financially.
The goal with insurance is to get the proper amount (not too much) and transfer the risk away from ourselves. For millennials, you need to be insured so if something does happen you aren’t required to take on a ton of debt to fund the crisis you are in.
While this may make sense in your head, this is not the most efficient way to pay off debt. The most efficient way to pay off debt is by focusing on one loan at a time after you pay the minimums for all the rest. Typically, paying off the loan with highest interest and lowest balance is the best idea. Then, once this loan is gone, roll that payment over towards the next loan. Repeat this until all debts are gone. This strategy creates momentum to help you move forward!
A health savings account, aka an HSA, is an account that can be used to pay for qualified medical expenses. HSA’s are triple tax advantaged meaning they are tax-deductible, grow tax-free, and then the money can be withdrawn tax-free for medical expenses. It is the only account that has all three tax benefits.
If you are someone that does not have a lot of money in savings, using your HSA for yearly medical expenses may be the right option for you. However, if you are someone with a large amount of savings, it might make sense to contribute to your HSA, invest it and let it grow, but not use it in the short term. Consult your advisor or CPA for determining what strategy makes the most sense for you and your family.
Learning to live within your means is the single most important thing you can do for yourself financially. If you can learn this at any early, you will be years ahead of everyone else. Do not get caught in the mindset that you will learn how to live within your means in the future when life gets more complex. Create this habit now. You will thank yourself for it later.
Paying off debt is a liberating feeling. Once people finally dig themselves out of this hole, the first instinct is to go and cancel the credit card so they never go back in that direction. However, by cancelling the card, you are lowering your total available credit which then increases your total credit usage. The combination of the two could hurt your credit score which you never want.
If you need money available in the next few years, you should not be investing that money. It’s that simple. The stock market is too volatile to take that risk. Think about it, what would you do if your portfolio is down 20% right when you need the money for the house? You probably would not be able to afford it.
If you need capital available in the short term, put it in a high yield savings account so you can achieve some growth without having the risk of losing a large sum of money. It is important to make sure your money is available when it is needed.
Hopefully, bringing some clarity around these topics is helpful for you. If you have any questions related to these myths or anything else please feel free to reach out. I am here to help!
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Disclaimer: Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining to your individual situation you should consult your financial advisor. For all of the disclaimers, please see my disclaimers page.
Financial Advisor