Archives

Happy, rich and young people investing in BitCoin on the bitmarket

The huge money mistake most millennials make

Re-posted from MSN.com

A majority of millennials treat their retirement accounts like a piggybank.

According to ETrade, more than a third of millennials make withdrawals from their 401(k) plans – and they use the money for a purchase, vacation or other personal expense.

“That’s a very high percentage,” said Gregg Murset, a certified financial planner and CEO of BusyKid, a savings app for kids and families. These early withdrawals point to an inability to set priorities, he says.

Young workers who do this clearly lack a full understanding of why they’re setting that money aside in the first place. Murset says three things are responsible for this gap.

The first is the lack of financial literacy. Only 17 states have a required personal finance course for high school students. This can set kids up for financial problems later in life, including lower credit scores.

Parents and schools blame each other, Murset says. “Parents say the schools should be teaching it,” he said. “And the schools say these lessons should be learned at home.”

We all make financial decisions all day, every day, according to Murset, making it more important than many school subjects.

Whether kids should learn about personal finance at school or at home, though, they are the ones who are left clueless about how to manage money.

Kids need to know what you have to do to earn money and, once you get it, what you can do with it.

The “three S’s” — saving, spending and sharing — are things adults do every day. “We go to work, we earn money,” Murset said. “We save some, we share some with charity and we spend the rest.”

Typical Americans spend and share, according to Murset. “Americans are generous people,” he said. Americans are also known for enthusiastic spending. But savings always gets short shrift.

Next is the issue of money that’s becoming more abstract. Increasingly, fewer people carry cash. “It’s getting to be a bigger problem,” Murset said. “Money is invisible to kids; to them, it’s numbers on a screen.”

That disconnect with the value of money can push millennials to make irresponsible financial decisions, such as taking money out of a retirement plan since it doesn’t seem as concrete as cash.

Last is millennials’ own lack of understanding how investing works.

Without some financial education and experience, it’s easy to see why someone would tap their 401(k) for some vacation money.

But this is perhaps the biggest misunderstanding. When it comes to saving for retirement, kids who have learned how money grows over time with compound interest will understand that $5,000, for instance, will grow over the decades to a sum far beyond its original amount.

Kids who successfully learn how to manage their money in a balanced way will eventually have the lightbulb moment that comes with saving money: “This small number turns into a big number over time,” Murset said.

Retirement Plan with glasses

UIT Managers Exhibit Poor Stock Selections Skill

Written by Larry Swedroe, Director of Research

Much—too much—has been said and written about the relative superiority of Roth IRAs versus Traditional IRAs. The debate over which is better too often involves the technical numerical merits. In truth, the Roth wins in almost every situation because of its massive behavioral advantage: a dollar in a Roth IRA is (almost) always worth more than a dollar in a Traditional IRA. This is true regardless of one’s age, but the Roth IRA is even more advantageous for Millennials.

I must first disclaim that you can disregard any discussion of Roth or Traditional IRA if you’re not taking full advantage of a corporate match in your employer’s 401(k)—free money is still better than tax-free money. But after you’ve “maxed out” the match in your corporate retirement account, here are the top three reasons Millennials should consider putting their next dollar of savings in a Roth IRA:

1) Life is liquid, but most retirement savings isn’t.

Yes, of course, in a perfect, linear world, every dollar we put in a retirement account would forevermore remain earmarked for our financial futures. But hyperbolic discounting—and the penalties and tax punishments associated with early withdrawal from most retirement savings vehicles—can scare us away from saving today for the distant future. The further the future, the more we fear.

The Roth IRA, however, allows you to remove whatever contributions you’ve made—your principal—without any taxes or penalties at any time for any reason. Therefore, even though I’d prefer you to generally employ a set-it-and-forget-it rule with your Roth and not touch it, if the privilege of liquidity in a Roth helps you save for retirement, I’m all for it.

2) There are too many competing priorities.

Millennials are dropped into the middle of a financial should-fest. You should pay down school loans, save up for a home down-payment, drive a cheap ride, purchase the proper level of insurance, enhance your credit and save three months’ worth of cash in emergency reserves. All while having a life? No chance.

Most personal finance instruction tells you what your priorities should be, and if you’re looking for that kind of direction, I’m happy to help in that regard as well. But it’s also not a mortal money sin to employ some Solomonic wisdom and compromise between, say, two worthy savings initiatives—like short-term emergency reserves and long-term retirement savings. Therefore, while I can’t go so far as to suggest that you bag the idea of building up cash savings in lieu of a Roth, I’m comfortable with you splitting your forces and dipping into your Roth IRA in the case of a true emergency. The challenge we all face is to define “true emergency” without self-deception.  (And no, splurging on concert tickets or a last minute vacation with friends don’t qualify.)

3) Roth contributions cost you less today than they will in the future.

Despite my sincerest attempt, I couldn’t avoid the more technical topic of taxes—and nor should I, in this case. That’s because it only stands to reason that you’re making less money—and therefore paying less in taxes—at the front end of your career than you will be in the future.

Therefore, in addition to beginning tax-free compounding sooner, Roth IRA contributions—which are not tax-deductible—will likely “cost you” less as a career newbie than they will as a seasoned executive. At SpaceX. On the first Mars colony. Furthermore, you can also make too much to contribute to a Roth IRA, progressively phasing out of eligibility at income of $118,000 for an individual and $186,000 for a household.

Like Coachella tickets, the opportunity to invest in a Roth IRA may not be around forever. Tax laws and retirement regulations are constantly evolving, and who knows what the future may hold. This increases their value for everyone, but especially for those who could benefit from them the most—Millennials.

This commentary originally appeared February 22 on Forbes.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2017, The BAM ALLIANCE

photos courtesy of InvestmentZen