Millennials Money Mistakes

Mistakes. We all make them. To err is human … and all that jazz. And when your perspective includes understanding that ‘mistakes’ are not failure by any means, rather an opportunity to learn, then you dust your self off, pick your self up, and continue tweaking your approach until desired results are achieved.

Just ask Confucius, who said that, ‘our greatest glory is not in never failing but in rising every time we fail.’

More contemporary example? How about Michael Jordan, the phenomenal basketball magician: ‘I’ve missed more than 9000 shots in my career.
I’ve lost almost 300 games. 26 times I’ve been trusted to take the game winning shot … and missed. I’ve failed over and over and over again in my life. That is why I succeed.’


Learning To Crawl

As they continue to shape our world, Millennials (folks who arrived on this planet sometime in the 1980s and 1990s) are manufacturing their fair share of mistakes, no different than past generations.

Consider my Twenty-Something Nieces: independent, ambitious, career oriented, single (with doe eyed beau in tow), no kids, no car, renting, socking away some earnings into savings, and tackling whatever life throws their way. Except personal finances. In this category, they’re somewhat at sea. Not that it will make The Nieces feel any better, but there’s a whole lot of other Millennials who are also scrounging around to find solid financial ground.


Don’ts and Do’s For TwentySomethings

I’m not pointing my finger or tsk tsk-ing the Millennial crowd for their general lack of financial savvy. There’s a learning curve for whatever we do in life. But I am saying, hey, it’s helpful to take stock, assess the current state of your finances, and consider how to improve.

For starters, there are some basic actions you can take to boost your balances for today and tomorrow. These actions (listed below) will not only make you ‘feel’ more financially stable, but will actually improve your net worth.


  1. Budgets Are SO Boring!

A budget is a roadmap, a guide, a friendly reminder as to what you may afford. Without a budget, spending is less disciplined and debt is more likely.

Sure, drafting a budget is not uno numero on your list of things to do on a sunny Saturday afternoon. Or any day for that matter. But I’m guessing that having a positive balance, and growing net worth, ranks high on the list of life goals. If yes, then set aside next Saturday for the boring task of budget drafting.

  1. Blind Eye To Debt

You carry debt. Okay, fine. Now, what are you going to do about it?

Whatever you do, don’t make believe that the debt does not exist. I bring this up because there are some folks who abstain from reality, choosing instead to live under clouds of illusion. Debt can be a tough issue to manage. I get it. But avoiding the issue only makes your situation worse and lessens the likelihood that you’ll achieve good financial health.

Figuring out a plan to pay off your debt, that’s what is necessary. Include this plan in your budget (oh, look, the budget is already coming in handy), and determine the monthly amount to be paid toward debt reduction. Sure, the faster you can pay down debt the better. But even if you’re paying a only small amount each month, that’s something. It’s building constructive financial habits. And as long as you keep on chipping away at debt, eventually it does disappear and you won’t regret it. No one regrets paying off debt.

  1. Sneaky Plastic

Airline Miles! $500 Cash Back! Free Hotel Night!

Financial institutions trip over themselves to offer an array of enticing credit card inducements. Why? Because they earn outrageous sums of money from interest charges.

As for you, the consumer, fact is that unless you pay the balance owing by the due date, you’ll be accumulating debt. Fast. And making financial institutions richer.

Plastic makes it too easy to give in to temptation, to buy something because you WANT it NOW. Financial institutions know this, they employ experts advising on human behaviour. And they know that there are millions of folks who have a terrible time trying to exercise self-discipline. And these folks buy STUFF they can’t afford, and they rationalize that they’ll be able to pay off the purchase before the bill arrives, and they get the bill and stick their head in the sand by making the minimum payment of ten dollars or so each month, and then incurring exorbitant interest charges.

Oy! Under NO circumstances is credit card debt a smart play.

Am I going too heavy on the chicken little act? I don’t think so. This is an issue that only seems to get bigger and bigger. Credit card debt, debt of any kind, can be a hefty psychological burden. Of course, financial too. And given enough time with too few payments, it bankrupts people.

So unless it’s absolutely essential to use plastic AND you know the full balance may be paid by due date, avoid credit cards. Instead, use a bank debit card, or a Visa / Mastercard debit card. This way, you spend only what you have since payment is debited directly from your bank account. And for you old-fashioned types, last time I checked, there’s no chance of going into debt when you pay with cash.

  1. Dormant Dough

THE NIECES, they’re accumulating savings but they’re either not investing or investing wayyyyy too conservatively. This is a problem. And this absence of risk tolerance is unique to this generation. Some researchers posit that it’s related to the deep recession of 2007-2009, and the resulting stock market meltdown.

Whatever the reason, Millennials would be wise to loosen up. I’m not saying to roll the dice on high-risk investments. But I am saying that the 0.25% savings rate offered by your local bank isn’t going to contribute much, if any, to your financial independence.

And you would be wise to consider the stock market. Yes, it’s a volatile venue. But volatility doesn’t necessarily mean you’re walking on the wild side of risk. Especially if you’re a BuddhaMoney wise investor who doesn’t pay much attention to daily financial news headlines. Instead, focus is on the long term (5+ years), knowing that stock market returns historically beat other asset classes.

Consider that, during the past 40 years, the S&P 500 index has averaged total returns (capital gains and dividends) of close to ten per cent. Let’s say the index returns about the same for the next forty years. If so, and you invest $100 / month, in forty years your account will be worth close to $600,000.

How do you get that $100 / month? You plan for it in your Budget (see, it’s a handy little document). It doesn’t matter if it’s $25, $50, $100, or $1,000 investment account contribution. Every dollar adds up. And the thirty-something YOU, the forty-something YOU, etc, will thank twenty-something YOU for being so wise and planning for your future.

For those who do not have the time or inclination to operate a discount broker investment account, find yourself a Robo-Advisor or skilled financial advisor (not all financial advisors are cut from the same pin-striped cloth) to help manage your investments. And definitely place a healthy portion of your investment dollars in equity based Index funds, such as the Vanguard 500 Index Investor for US investors, and the Blackrock S&P/TSX 60 Index for Canadian investors.

  1. High On Spending

In your 20s, you’re likely to start earning real money. And maybe you’re salivating at all the STUFF you can buy knowing it’s within reach: a new car, luxury condo, designer clothes. Right. But within reach doesn’t mean you may afford to buy the luxury condo.

Rather, it likely means you’re the lucky winner of a whopper of a mortgage, get to stress over making monthly payments, and go light on furniture because daily spending is tight now that housing costs eat up more than half your take home pay. Sure, you want a materially comfortable home like your parents. But you’re forgetting that your parents likely worked five, ten or twenty years before being able to afford all the cozy extras.

So for all you Impulsive Izzys, slow it down. Bring Patience into the mix. Only buy what you can afford without taking on unmanageable debt. And when you get that raise at work, this doesn’t mean you should go all ga ga and run out and buy more STUFF, or more expensive STUFF.

Instead, it means it’s time to review your Budget, allocate more money to debt reduction and investing, and then determine how best to spend discretionary funds. This is a Balanced approach to finances, one that reduces debt, increases net worth, and lets the shine sun on your financial health.


 

unknownEnter Buddha

A jug is filled with water drop by drop. There is no other way.

Blissful Money Rules

Last week, my 27 year-old Niece called me.

“Hey! BuddhaMoneyLama, I have a problem I’d like to talk about.”

“Sure, kiddo.”

“Well, with my new job, I’m finally making decent money. I mean, after paying for rent, food, utilities and other necessities, I actually have money left over.”

“Too much money? This is a problem?”

“Ha ha, you’re so funny. The problem is that I don’t know what to do with my money. No one ever taught me and I feel like I don’t even know the basics.

“So you called me? Such a sweetheart!”

“Can you help?

“Are you kidding? BuddhaMoneyLama lives for these situations!”

“So, where do we start?”

“Where would you like to start?”

“That’s the thing; I don’t know. All I know is that I want to buy a house one day. But I don’t know how to get myself to a place where I’ll have enough money to afford a down payment and all the other costs that go along with home ownership.”

“How about we start with talking about the Blissful Money Rules.”

“Uh, okay?”

“These are Rules that you absolutely, positively, unequivocally need to know to empower yourself, and get your self walking on the path toward home ownership and greater wealth.”


Blissful Money Rule #1 … What’s The Plan, Stan?

Some folks prefer to surf on a hope and a prayer when it comes to money issues. Not BuddhaMoney. Instead, we favor creating a detailed plan for your self. Because a Money Plan plots your best path for taking control of spending and saving. Do this and you’re halfway to reaching your financial goals.

“I’ve never written a Money Plan. Help?”

“What do you say we walk this path together, step by step.”

  • Goals. Write them down. When you know what your goals are, saving is easier. For you, dear Niece, your medium term goal is to buy a home. Keep this in mind every day when you’re spending money. Because every dollar you spend somewhere else is a dollar that’s not saved toward your dream home.
  • Expenses. Once you know your goals, write down all of your expenses and figure out which ones may be reduced or cut out altogether. And the beauty of cutting spending? Reduced expenditures automatically translates into more money in your pocket. Obvious? Sure. But some folks need to be reminded, to stay focused on their goals.

Here are some examples for you to chew on:

Cable. Cut the cord. Who needs to pay for cable? Really, who needs television at all? For all those who haven’t completely abandoned television, there’s Netflix at about $10/month, and other free and inexpensive viewing services available online.

Cell Phone. Check out discount carriers and do not sign up for a large data plan. If you need some data, go for the minimum. Because you just don’t NEED to be constantly surfing the web on your phone. It’s a bad habit for too many of us. Your time would be better spent daydreaming or, Buddha forbid, reading a book, or tuning out and just being quiet. You’ll be amazed at how quiet time recharges energy and lifts spirits.

Home and Car Insurance. Shop around and compare prices. All the insurance companies offer the same coverage but prices may vary a fair bit. Be sure you’re not overpaying.

Coffee/Tea. Drop $5/day getting your coffee on the outside, multiply by 365 days, and that’s $1,825/year. Yikes! Is it worth it?

Fuel. Fill up your gas tank once a week at $50/pop and that’s $2600/year – compared to paying nothing for riding a bike to get around town (other than initial bike cost) or much less for car sharing or public transit.

Restaurants. Watch this one. It’s too easy to drop big dollars when eating out. Allow yourself a certain amount each month and stick to your budget.

  • Track Money Flow. Once you’ve listed all of your expenses, and considered what to eliminate and what to reduce, it sure helps if you track your spending. Do this the old-fashioned way using pen and paper, a journal is a good idea, or use an app of your choice; here’s a few worth checking out:

https://www.levelmoney.com

https://www.mint.com

http://www.dollarbird.co

  • Bottom Line. Really, it comes down to a matter of priorities. If purchasing a new home is your priority then you’ll start making a habit of cutting spending.

Blissful Money Rule #2 … Save, Save, Minimize Spending, and Save Some More

You’ve heard it so often that maybe you’ve tuned out. Well, BuddhaMoney is here to tune you back in: save your money. Make saving a habit. Because you need savings to achieve financial freedom.

How much should you save? Calculate savings as a percentage of your net your income, after deducting expenses. Ballpark number for savings: 10%. If you can save more, good for you; you’ll achieve your goals that much sooner.

And once you commit to a percentage, stick with it! No creative rationalizing (i.e., but I really need to drop five grand on a vacation to Mexico and I swear I’ll make up the lost savings soon), and no inventive, trivial justifications (i.e., it was a once in a lifetime sale and, really, the more I spent, the more I saved).

Of course, if you spend less than you earn, then staying disciplined about savings is that much easier. If you spend more than you earn, well, you’ve got work to do because at this rate there will not be any savings, and financial freedom is a fantasy.

No matter what you earn, you can save when you cut down expenses. Sure, you may have to ditch old habits and establish new ones, but it will be well worth it. Every step closer you walk toward your savings goal or eliminating debt will feel, well, quite excellent, and will reinforce your desire to continue saving, largely because you’ll know that you’re taking control of your finances and your life. And that feels right and it feels good.


Blissful Money Rule #3 … You Do NOT Want Debt

The blissful truth: there’s no freedom in carrying debt. And your goal should be financial freedom, which translates into minimal money related stress and headaches.

That said, not all debt is created equally.

Mortgage debt for example, serves a worthwhile purpose. Homes cost a fair chunk of change, and few people are able to pay all cash for their home. So, you borrow from a financial institution. Okay, this is all good as long as you can afford the mortgage payments. Because as long as you have the mortgage, yes, you’re building equity. Kudos. But you’re also paying interest. Drag on your savings. So, before you sign up with your friendly neighborhood banker for that big ticket mortgage, draft your self a mortgage repayment plan, and be sure this is a plan you can follow through on.

As for credit cards, the goal is to NEVER pay a cent of interest for credit cards. If you cannot afford to pay the balance owing each month in full, then don’t use a card. Carry interest and you’ll be paying an annualized rate of close to 30%. Robbery? Yes. Legal? Yes. Why do you think Visa (NYSE: V) and Mastercard (NYSE: MA) are massive companies each with a stock market value north of $100 Billion? Charging interest is a wonderful game to play when you’re the lender.

So what do you do? Toss all credit cards from your wallet except one. Suggest keeping a Visa or Mastercard as these are accepted by most every merchant. Use the card only when necessary (other than Sweden, most countries remain on board with coin and paper currency – http://www.newyorker.com/magazine/2016/10/10/imagining-a-cashless-world).


Blissful Money Rule #4 … Invest Your Dough

Don’t leave your savings in a bank account earning practically nothing. Invest your money. When you invest, your money is going to work, not you. This is what you want. The more you can afford to invest the better. And, similar to being disciplined about savings, be disciplined about building your investments. Set aside a certain amount each month that makes its way directly to the investment account.

Here’s a nut and bolts illustration that may whet your investing appetite: if you invest $10,000 at a 5% annual return, you will earn $500 in one year. In year 2, the $10,500 will generate $525, for a grand total after two years of 11,025. After 20 years, the $10k turns into $26,532.98. This is the power of compounding returns and a long-term investment horizon.


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Enter Buddha

The second Noble Truth teaches that trishna (thirst or craving)  causes stress or suffering. Wanting to own a home, wanting to be financially secure is perfectly fine and good. The challenge is to avoid clinging to these wants such that wants become obsessive cravings and we forget what’s important: to be grateful for our life, for who is in our life, and for what we have.


Blissful Money Rule #5 … It’s All About You

Here, I’m talking about stepping up and taking responsibility. No one will walk the path for you (although BuddhaMoney sure will guide you in the right direction). It’s your decision whether or not to empower yourself, take control of your finances, and eventually achieve financial freedom.