8 may 2019


(photo credit Sarah Pflug | burst.shopify.com)

Thinkadvisor.com recently published an excellent list of financial mistakes made by millenials. Most of these arise from the fact that it is hard for younger people to imagine how they will feel about their financial situation when they are older.

This is normal, of course. But the cost of waiting too long to line up finances to minimize financial worries later in life can be high.

This list of mistakes can be rephrased into good practical advice for people in their early stages of their work and investment lives. Here are my favorites:

1) Choose a Roth 401(k) instead of a traditional 401(k)

Assuming that income is lower early on in your career, you are better off paying taxes now and letting your investments grow tax-free. You want to pay taxes when your income is lower, which means that your effective tax rate and the tax dollars you pay are lower than later on in your career when you are likely to earn more and pay higher rates. If your company offers a Roth 401(k), choose it.

2) Save as much as you can.

Many wait until their 30s to start putting money in their 401(k)s or IRAs. This means much less for their retirement and also means that they will have to work a lot longer when they are old. The sooner you start, the more time you will have for your investment to compound gains.

3) Avoid very risky investments.

Sometimes millennials are tempted by very risky investments like penny stocks. Because they are priced very low and are very volatile, they seem to offer a good chance to get rich quick. But this rarely happens. Usually they are cheap for a reason, and their low liquidity means that they are easy to buy and difficult to sell. A popular investment among millenials at one point was Bitcoin, which also was so volatile that it seemed always possible to exit at a profit. Those who bought it upwards of $10,000 found out the hard way what risk really means. It is true that being young allows you to take more risk. But a higher risk/return portfolio profile, as in an 80/20 stock/bond mix, is different than straight-up gambling and speculation in penny stocks or fad investments.

4) Keep an emergency fund.

There are plenty of stories of millennials having to move back with their parents because of totally unexpected hospital bills, job losses, home repairs, or emergency expenses they couldn't afford. Without a cash reserve, it is very difficult to build wealth and work your way toward financial security and independence.

5) Roll over retirement funds.

Young people change jobs often early in their careers. If they accumulated money at one place and then leave, they sometimes forgo rolling retirement assets in their company plans thinking that the amounts are too small to bother. But a small amount can grow into a lot simply with time (see #2)

6) Don’t buy a story.

Investors have always fallen prey to a story that sounds great, but millenials are especially targeted today by many apps that are great at telling stories – cryptocurrencies, IPOs, penny stocks, real estate, etc. These stories invariably sound far more interesting than the “boring” index-based investing styles that may be more appropriate and have proven solid over the years. As compelling as a “story” may be and how convenient it may be to invest via apps, these often represent concentrated risks that people rarely understand or can afford.

7) Do not celebrate a tax refund.

Often, millennials see a tax refund as a windfall. This promotes bad habits and is mathematically wrong. A tax refund occurs after you lent money to the government at a 0% rate due to a paycheck withholding that was too high. By adjusting your withholding, you can achieve the same result – more money in your pocket – without the temptation of spending money that was yours to begin with.

8) Do not trust the internet.

Millennials are a driven, take-charge generation, but that DIY attitude sometimes makes them too dependent on finding information on the internet that is not always correct. They are not alone in being misled – older people can also fall for falsehoods, especially those that appeal to personal biases. Before implementing actions based solely on internet research, it pays to have at least one consultation with a financial professional to discuss an investment idea.