Attaining financial independence for millennials is challenging due to the financial obligations that they have to deal with. These obligations include their student loans and mortgage payments. The pandemic only increased the challenge of dealing with these financial obligations after the health crisis caused an economic recession.
Even though the situation has improved, it’s still essential for millennials to avoid some mistakes when making financial decisions, particularly when it comes to attaining financial independence. Here are some mistakes that millennials should avoid when they work on their finances.
Keeping Up with the Trends
Learning self-control is important for millennials when they work on their finances. They should avoid making spur-of-the-moment decisions. Even as they listen to their peers when they make financial decisions, they should prevent basing their decisions on what they saw on Reddit or social media channels.
When the stock price of GameStop soared, investors who already owned the stock cashed in and saw their investment growing overnight. But people who bought the stock after its price went up made a costly mistake after its price went down. To avoid this, millennials should base their financial decisions on solid financial fundamentals.
Similarly, when they purchase items, they should focus on function rather than form. Unless they have a lot of money to spend, they need to focus on value for their money. For instance, when looking for a car, millennials should look for “buy here pay here” auto dealerships. These dealerships offer deals that are easy on the budget without going through financial institutions. This situation is ideal for people with a low credit score since they focus on the buyer’s salary, job, and capability to pay for the car.
Spending Without a Budget
Millennials should also create a budget for their expenses. This allows them to know where their money is going. It also allows prevents their costs from exceeding their income. Budgeting also allows them to avoid unnecessary expenses.
For instance, the cost of gourmet coffee does not seem to be significant if they drink it once or twice a month. But once they have it every day for the whole month, its cost will accumulate and have a considerable effect on their finances.
In this situation, it can also affect their saving since they will have to dip into it to pay for rent and utilities. Even if they get a raise in their jobs, they should increase their savings rather than increase their expenses. They should stick to their budget and avoid making unnecessary expenses to allow them to work towards financial independence.
Neglecting to Create an Emergency Fund
When millennials set their budget, they should set aside funds for an emergency fund. The emergency fund gives them something to use in case they lose their job or need cash due to an emergency. They should put the fund in a bank account that allows them to access it quickly. They should not mind the low-interest rates since the fund gives them a source of cash when they need it.
The amount of money on the emergency fund depends on their situation. It should be big enough to cover daily expenses in case they lose their jobs. Setting aside six months’ worth of funds is a good idea. But having a year’s worth of money is a better option, especially if another global level event happens in the future.
But it is challenging for millennials to set aside money for the emergency fund if they live paycheck to paycheck. Despite this, they should try to save a small amount to cover some expenses in case something happens to their financial situation in the future.
Waiting Too Long to Start Saving for Retirement
Aside from their emergency fund, millennials should start saving for their retirement as early as possible. In addition to their 401(k) plans, millennials should also have other investments for their retirement. They should focus on long-term investments when they save for their retirement. So, millennials should have a diverse financial portfolio.
A diverse portfolio allows them to cover any losses in one investment vehicle through gains in another. In this situation, their investment should have a good combination of investments if their finances allow it. They should invest in stocks, mutual funds, bonds, and annuities, among others.
Having insurance is also a good idea, especially if the insurance they will get has an investment option. Additionally, medical insurance allows them to save on medical expenses if they get sick in the future.
Millennials should focus on dealing with their financial obligations while working towards financial independence in the future. This way, they can handle their finances efficiently.