Unfortunately, young people are not as financially literate as they'd like to believe.
My generation of Millennials is notorious for thinking we've got it all figured out, but according to a recent study on financial literacy, we're not nearly as clever when it comes to money management as we'd like to believe. Only 8 percent of 5,500 Millennials surveyed demonstrated a high level of knowledge when it comes to managing finances, while less than a quarter had a basic understanding.
So, which concepts are Millennials missing, exactly? What are the things these young people are doing wrong while preparing for the future? I've compiled the following list from a number of finance bloggers, many of whom seem to agree on the same topics.
1. No budget
Knowing how to budget is absolutely essential for financial success, and yet it's rarely taught in schools, or even by parents. As Kamika Smith wrote for Miss Millennial magazine, "Budgeting allows you to tell your money where to go instead of looking back and wondering where it went." It helps you to live within your means, while allocating money to other important areas of your life.
2. Living off student debt
You may have to live off student debt to some extent while in school, but the key is not to rack up any more debt than is absolutely necessary. Take only what you need. A loan should cover tuition, textbooks, and (possibly) living costs, but beyond that, it's better to squeeze in a part-time job to pay for the rest of your lifestyle.
3. Being too optimistic
Millennials are notorious for their high expectations; in some ways, this is endearing, but in other ways it can be shortsighted. Many young people graduate from university, expecting to land a dream job instantly and establish a lifestyle that reflects that, all the while forgetting that it took their parents decades to build their lives up to a comfortable point. Financial stability takes time and patience and persistence.
4. Using credit irresponsibly
Using a credit card requires maturity, as it is an act of creating debt, no matter how 'normal' it's perceived in our society. A credit card can be hugely useful, but you should understand how it works before using one, especially the importance of paying off statements in full every month.
5. Not setting lifestyle goals
Financial goals are one thing, such as "I want to make X dollars per month" or "I hope to save X by the time I'm 40." But as Smith points out, you need to create lifestyle goals to go along with those so that you know where to allocate additional funds once you're making them, not just spend them mindlessly, as is the tendency as income increases. For example:
" 'I want to make $10,000 per month from at least two different sources of income. I also want to only work 30 hours per week, take a two-week vacation each year. When I reach that goal, I am going to give back to my community.' This goal is specific and you know exactly what you are working towards."
6. Not saving for retirement
Many young people make the mistake of thinking retirement is so far off that it's pointless to start saving now. That's wrong: it's never too early to save money. One source cites a survey that found two-thirds of Millennials plan to retire by 65, but 70 percent have not started saving for it. It's important to take advantage of matching contributions offered by employers; it's free money, after all.
7. No emergency fund or insurance
Rainy days are no fun to consider, but they are part of reality. It's smart to save a chunk of money (at least $1,000, but ideally 2-3 months' worth of expenses) for emergencies. Insurance is another boring expense that may feel like a waste, but can save you a ton in a bad situation. From the Life Happens blog:
"One of the benefits of getting a life insurance policy early on is that it will likely cost you less now than later—life insurance is cheaper the younger and healthier you are. Plus, you have no idea if your health might change, which could make getting coverage much more expensive or even impossible later on."
8. Not learning the 'hacks'
If your parents didn't exhibit frugal behavior, then chances are you haven't picked it up by osmosis over the years. There are so many ways in which to save money quickly and easily. Start with this quick introductory list of 14 lifestyle hacks that will make you money, and go from there. I like The Simple Dollar and The Financial Diet.