Did you know you’re primed for financial success when you’re in your 20s and 30s?
It’s true! You’re in the best position to build and grow wealth because you have time on your side. Now is when you should start saving and investing a percentage of your income, to give your nest egg enough time to benefit from the effects of compounding interest.
Of course, you can lose ground on your good position to reach financial success if you make big mistakes along the way.
Dealing with Money Mistakes on the Path to Progress
It’s not necessarily the end of the world if you do slip up and make some money mistakes as you go. A few mistakes probably won’t derail you from where you want to go. Even something that feels like a really big slip-up today might just look like a blip on the radar when you look back in 30 years.
In fact, mistakes can be good for you. That’s the case when you can learn something about yourself, your money, or your life from a failure or misstep.
This is all a positive way to look at things. But in addition to being optimistic, we need to be realistic. And the reality is, there are some big money mistakes that we see a lot of Millennials make.
These are the kinds of things that can make a seriously negative impact on your financial situation in the long-term if you don’t address them now.
Examine this list of money mistakes Millennials tend to make — and then check out our suggestions on how to fix them, so you can get on the right track immediately.
1. Spending on Status Symbols
There’s a quote you may have heard, which is frequently attributed to writer Robert Quillen: “Too many people spend money they haven’t earned to buy things they don’t want to impress people they don’t like.”
Have you heard some variation of this quote before? It’s been credited to everyone from Will Rogers to Will Smith, but regardless of who said it and how exactly they originally worded it, it contains a great bit of wisdom.
Spending on stuff is not going to make you happy. Spending on stuff because society says you should? Now that’s a recipe that will leave you downright miserable.
That’s not to say you should never spend on luxuries items, or use your money to buy things you will use and enjoy. But if you take that to an extreme, you’re going to have a lot of stuff andd very little wealth to show for all your hard work.
As one Quora user put it after she realized she had squandered thousands of dollars on useless items, “I wasted time, effort, and mental energy on caring about material goods and the superficial pursuit of looking rich. Ironically, my efforts to appear rich actually had a negative impact on my actual wealth!”
One potential solution to this mistake?
Stop spending to impress other people. Reduce how much you spend on stuff. Focus on spending time doing what you love with people you care about instead.
2. Throwing ALL Your Extra Cash Toward Student Loans
Let’s say you have a $250 student loan payment you need to make every month. But your debt drives you crazy and you hate that you’re spending money on interest.
You know if you can just pay off the loan, you’ll be free from your debt – and you’ll also save money, since the faster you pay it off, the sooner you can stop paying that interest!
So you put $500 per month toward your loan instead. You can’t save or invest any money, but you’re on the fast track to being debt-free.
You might think you’re doing the right thing by trying to pay off your student loans as fast as you can. But have you considered that you might be missing out on an opportunity to build wealth with some of that money?
If your student loan debt interest rate is around 4 percent, you might be better off putting your money in the stock market and investing for a better return.
If you can earn a 7 percent return, for example, you’re financially better off if you continue to make your $250 student loan payment and put your extra $250 into the market.
You need to make at least the minimum payments on your debt. But if you have money left over, consider investing it so you can build wealth while also paying off what you owe.
3. Avoiding Investments Altogether
You could be making mistake #2 because of mistake #3: fearing the stock market. This is understandable, because you probably saw a lot of people, your parents included, suffer during the Great Recession. Our generation was between the ages of 10 and 25 when it hit – prime formative years for our ideas about money. You may feel like there’s no way you’re going to let Wall Street take your money, too.
The thing is, investing in the stock market isn’t all like how they portray it in The Wolf of Wall Street or other Hollywood movies. Yes, there are a lot of ways to lose your money in the market. But smart, strategic investors who invest rationally – and avoid get-rich-quick schemes – can build wealth over time by investing appropriately for their own goals and time horizon.
Even if you are very familiar with the 2008 financial meltdown, but what you may not realize is that the people who got burned the worst were the ones who sold when the market bottomed out. What about the people who held on to all their assets between 2008 and today?
Their wealth grew, because they never sold and actualized their losses. Until you sell, your losses are unrealized – which is why it’s so important to stay invested for the long haul, even through turbulent times in the market.
If you’re still not convinced that you can manage risk and invest strategically, consider this: you might take an even bigger risk by not investing at all. Say you save money in a savings account where it earned 1.6 percent. Better than risking it all in the market, right?
Well, not really. Over time, inflation will erode the value of your money and leave you with cash that’s worth less in 30 years than it is today.
Inflation tends to increase at roughly 2% every year. Compared to your interest rate, the money you put in this year will actually lose purchasing power over time.
Take the leap into investing — just make sure you’re doing it right. Start educating yourself on what you need to know, or talk to a financial advisor who can help provide advice and guidance so you can reach financial success.
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