Millennials have come of age, and members of Generation Z are hot on their heels. Along with the typical struggles of adulthood, they’re realizing that financial management requires more than luck.
Budgeting might be one of the biggest challenges for up-and-comers, and early mistakes can lead to serious problems down the road. How are members of the generation that now makes up the largest demographic in the U.S. workforce going to make better financial decisions than their Baby Boomer parents? By bucking generational expectations and taking charge of their finances from the get-go.
Myths and misconceptions are ubiquitous regarding young adults and their relationships with their wallets. Despite the perception that all Millennials and Gen Zers are lazy and entitled, they’re making great progress toward building wealth. In fact, one study found that Millennials are saving more for retirement than their Baby Boomer and Gen X counterparts.
Aside from these generational generalizations, there are numerous myths out there in the form of bad financial advice. All young people have the opportunity for economic success — but only if they can ignore this inaccurate information and forge their own fiscal paths.
Myth 1: Squirreling money away in a savings account is the way to go
Depositing your paycheck in a bank account and letting it sit in perpetuity makes only slightly more sense than stuffing it under your mattress. Banks are certainly safe and regulated, but a low-interest savings account offers a minimal return on investment.
It’s easier to meet short- and long-term financial objectives by using higher-interest certificates of deposit. Many banks offer introductory rates for CDs, which should keep pace with — or at least come close to — inflation rates. Weigh your options locally and online, and then crunch some numbers to determine how to make the most of your nonessential cash.
Myth 2: It's best to pay off your college debt ASAP
It’s a tempting proposition, but expediting your college debt payoff might not be the best use of your liquid cash. By lengthening the amount of time it takes to repay your debt, you’ll end up incurring lower monthly payments and having more wiggle room in your budget. As long as you chip away at your debt systematically and never miss a payment, you’ll steadily pay off your obligations while building credit.
Provided the interest rate on your student loans isn’t excessive — less than 10 percent, for instance — it’s a much better decision to take any wiggle room in your budget and invest it in stocks or bonds. If you’re paying an interest rate of 6 percent on your loans but could make an investment with an 8 percent return, for example, you’re much better off sticking with minimum payments and sinking any extra funds into investments.
Myth 3: Consumers should avoid credit cards at all costs
Millennials and members of Gen Z have heard countless horror stories about credit card debt, but those tales are only half-truths. Provided you pay off your balance each month, credit cards present an incredible opportunity to build your credit score - which becomes crucial when it’s time to buy a car or secure a home loan.
It’s equally important to choose the best credit card for your financial needs. As long as you spend within your means and pay things off regularly, it’s not a bad idea to rely on your credit card for routine expenses such as groceries or your Netflix bill. And if you love to travel — Millennials account for up to 20 percent of people taking international vacations in recent years — you’ll find it much easier to pay with plastic. You’ll also enjoy additional protection, have the potential to earn points or airline miles, and be able to track your spending habits like a boss.
Myth 4: It's better to rent than to buy real estate
Homeowners enjoy benefits such as tax breaks, a diversified investment portfolio, increased equity, and a stable monthly mortgage payment (which makes budgeting easier). No one should be scared into renting when home ownership is perfectly reasonable — even if you have significant student debt.
Zillow analyzed the relationship between college graduates and homeownership, discovering that debt made little difference in most cases and created a decline of only 5 percent in homeownership for graduates who had $50,000 of student debt. Given those facts, young professionals paying down debt for their bachelor’s or master’s degrees can feel less hesitant about buying a home.
Myth 5: Financial expertise comes with age
Financial management is a great equalizer: A 20-something can make wiser choices than a 50-something. Young professionals shouldn’t accept the idea that they’re doomed to make bad decisions early in their careers. Age doesn’t magically make people experts and managing their cash flow and investments.
It’s crucial to develop good financial habits early in life, as those small decisions can have massive ripples decades down the road. While there’s a cost associated with the service, it’s a great idea for young adults to meet with an advisor early on to get their finances on the right track. Just make sure any fees you pay for that advice are offset by potential returns.
Myth 6: Frugality is the best route to wealth
Some people are thrifty by nature and get a rush from making deals and cutting expenses. For those select few individuals, scrimping is stimulating. Other people feel psychologically burdened when they constantly deny themselves basic pleasures, such as going to a nice restaurant or taking a trip to the beach.
Martyrdom takes plenty of forms, and there’s no reason to sacrifice your quality of life over a few pennies. Financial responsibility is important, but not at the risk of feeling saddled with guilt because you ordered an Applebee’s appetizer.
The majority of educational institutions don’t teach young people how to manage their finances, and their parents aren’t always the best money mentors. Consequently, Millennials and Gen Zers should use their web savvy to investigate budgetary options and pave their own paths to fiscal freedom.
From apps to websites, there’s no lack of practical information on the internet; individuals who make the most of this killer advice might just help put the next generations on the map as financial phenoms.
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