Archives

Happy young couple jumping into the pool while holding a bunch of balloons

4 Money Mistakes Millennials Are Making

Re-posted from MSN.COM

The crushing weight of student debt and the Great Recession have shaped millennials’ relationship with money, for better or worse. In some, it has created enough anxiety about financial security that they save as much as they can and avoid any type of credit agreement that could cause them to take on more debt. Others become so preoccupied with their present expenses that they fail to save for the future.

Unfortunately, both approaches have their drawbacks. Here are a few of the most common money mistakes millennials are making — and what you can do to fix them.

1. Not preparing for the unexpected

About 46% of millennials don’t have any money set aside in an emergency fund, according to a 2017 survey by GOBankingRates. This can pose a problem when an unexpected event like a home repair, a costly medical bill, or a sudden job loss puts an extra strain on your budget. Without any savings to cover these financial emergencies, you may have no choice but to take on debt or fall behind on your rent or mortgage payment and other bills, which can have a serious impact on your creditworthiness.

Most experts recommend keeping at least three to six months’ worth of expenses in a savings account to help cover unexpected expenses. Look at your monthly bills and calculate how much you would need to cover them. Then multiply that number by three (or six if you want to be extra safe) and create a weekly savings goal to help you reach it.

2. Avoiding credit

Only 1 in 3 millennials owns a credit card, according to a recent study by Bankrate. While it’s wise not to overuse credit, avoiding it entirely can pose problems, especially when you go to buy a home or finance another big purchase.

Just about everyone will apply for a loan at some point in their lives. When you do, your lender will pull your credit reports to assess how responsible you’ve been with your money in the past. Your credit reports contain information on all active credit accounts in your name, but if you don’t have any, you’re not giving lenders anything to go on. This can make them hesitant to work with you, and they may deny your loan application or charge you a higher interest rate than someone with a well-established credit history. If you’d like to become a homeowner someday, then a nonexistent credit history will be a major obstacle.

You don’t have to use credit cards, but it is important to build up your credit history in some way. Paying off student loans can help, and if you take out an auto loan or personal loan, these will appear on your credit report as well. But for many, credit cards are the ideal credit-building tool because you can use them regularly, and as long as you pay the balance in full each month, you won’t have to pay any interest at all.

3. Not saving for retirement

For many millennials, paying off student loans is a much more pressing concern than saving for retirement. After all, they have 30 to 40 years left to work, so what’s the big deal if they put off retirement savings for a few years?

The trouble is that your most valuable retirement contributions are the ones you make while you’re young. The sooner you put funds in a retirement account, the more compound interest can make them grow. When you get a late start, your money has less time to gain interest before you need to start using it.

Say you put $10,000 in a retirement account when you’re 25 years old. Assuming your investments earn 8% per year, that $10,000 will have grown to $253,000 by the time you’re ready to retire at age 67. If you waited until age 35 to put that money in, it would only grow to $117,000. And if you waited until 45, you’d end up with only $54,000.

Waiting to start saving for retirement may not seem like a big deal, but it can mean a difference of hundreds of thousands of dollars. If you have any extra money left over after you’ve paid your bills each month, put it into your 401(k). If your employer doesn’t offer one, then open an IRA.

4. Spending frivolously

Millennials are more likely to indulge their immediate wants than baby boomers and Gen X-ers are today. In a survey by Schwab, 60% of millennials admit to spending more than $4 on their coffee (though it doesn’t specify how often), and they’re more likely to eat out and spend money on clothing and electronics they don’t need. While it’s healthy to indulge these wants occasionally, doing it frequently can take a large chunk out of your budget, leaving you less money to put toward retirement and your emergency fund.

Take a good look at how much you’re spending on the non-essentials each month and look for areas where you may be able to cut back. Making your coffee at home, rather than purchasing it at your favorite chain, will save you over $1,300 a year on average. This assumes that an average cup of Joe from a cafe is $4, while the cost of making a cup at home is $0.17, and you are drinking one cup per day. Dining in and curbing your shopping could free up even more money.

For millennials, it’s all about maintaining a balance between what you need now and what you’ll need later. By remaining mindful of how your present decisions are impacting your future finances, you’ll be able to make smart choices that will serve you well today and in all of your tomorrows.

Change Jar

6 Money Saving Tips You Can’t Afford To Miss

Re-posted from AICPA.ORG

6 Money-Saving Tips You Can’t Afford to Miss

Those fun, light-hearted GEICO commercials that ask if you are tired of paying too much for car insurance hone in on the idea of wasting your money –– paying too much for something or not getting enough.

As a CPA who is passionate about making my hard-earned money work for me, it’s important to take time to critically analyze what my cash is doing. Busy lives often lend themselves to costly complacency in one’s personal finances. Basically, we want bill paying done and our retirement planning intact with as minimal effort as possible.

At least once per year, I do a serious deep-cleaning scrub on my family’s finances. I look at what we’re paying and why, and I see where we need to do better. This “scrub” saves us thousands of dollars and I suggest each of you take a few hours each year to review your finances critically. Don’t let your money run itself; it needs you to keep it on track.

Here are six tips to make your money work for you (consider sharing these with your clients):

  1. Carefully review your credit/debit card auto-drafts.

Did you join Consumer Reports to get insight on what car to buy and forget to cancel it after your purchase? Or sign up for other subscription services that you haven’t used in months? Review your statements for these $10-20 no-value bills. Though small, they add up quickly.

On the flip side, auto-draft anything you can to your credit card. You’ll consolidate bill paying, and get paid to pay your bills. Often, electricity, water, cable, etc., can be auto-drafted. One can easily earn hundreds of dollars each year (in points and rewards) by effectively using a credit card. But, don’t forget to pay off the balance each month! Interest on credit cards is extremely costly. I suggest setting up another auto-draft to pay your credit card bill directly from your bank account.

  1. Bundle your insurance (home, automobiles, etc.), and scrutinize rate increases.

These bills can significantly fluctuate each year as your insurance carrier offers new incentives or changes its rates (sometimes arbitrarily). This year, I noticed our home and auto insurance went up by about $1,500. After calling my agent, I learned that there was an explanation for some of it (insurance regulation hiked up the price), but there was no excuse for the bulk of it. After asking my agent to price shop, I decreased my bill and increased my coverage. My agent wasn’t going to do this price shopping without my nagging, but a five-minute phone call saved me over a thousand dollars.

  1. Review your investments.

Make sure you are deferring appropriately to your 401(k), taking advantage of company matches and profit sharing plans. Also, ensure you’re planning for retirement with other investment vehicles (IRAs, etc.). Review your portfolio, making sure it’s well-balanced. Consider contacting your 401(k) or brokerage adviser to confirm your investments (as a whole) keep your plans on track. Consider making serious adjustments the older you get; the closer you are to retirement, the less risk you may want to take.

  1. Know the market rates for cell phone plans, cable, internet, etc., and don’t be afraid to negotiate.

Cell phone rates have actually gone down recently as more competition enters the market. If you bundle plans with family members, you may be able to save even more. Plus, many employers offer their employees discounts for certain carriers.

Cable/internet, for example, is a bill that I need to renegotiate each year. Otherwise, they go up significantly. Call your cable/internet company and ask about promotions, and let them know you’re not happy that your bill went up. Talk to someone in their customer retention group. They usually have more flexibility to keep your rates lower (or offer you freebies like premium channels) to keep you from switching to a competitor. If it doesn’t go well the first call (and you have time and patience), call back. A different representative may give you a better deal.

  1. Review your debt financing and interest rates.

Prioritize what to pay off quickest based on which item has the highest interest rate. Explore where you may be able to decrease interest rates by re-financing or consolidating debt. Make an extra payment that goes directly to principal. You can save significant money by paying off your debt sooner.

  1. Know what you’re worth (net equity).

Annually, prepare a financial statement. Add up your assets (cash, investments, property, etc.) and subtract your liabilities (loans, etc.) to yield your net worth. Are you too heavily in debt, or saving enough for retirement? These are important questions to know your true financial health.

I use Mint.com (a free application) to track our family’s progress, but a simple spreadsheet or other system works. The point is: don’t let your finances be a surprise to you.

The AICPA is committed to helping us achieve financial security. Visit feedthepig.org for additional tips and resources to help you budget, invest and reduce debt.

Susan C. Allen, CPA, CITP, CGMA, Senior Manager, Tax Practice and Ethics-Public Accounting, Association of Certified Professional Accountants

  • Contact us

  • This field is for validation purposes and should be left unchanged.
Contact Us