Guys and Gals,
It’s time to debunk some of the most common millennial money myths out there.
It seems to happen all too often that we hear a “hot new money tip” from someone and decide to follow that tip.
But we fail to realize that the person who gave us this money tip might not be a financial advisor.
They actually might not be following this “hot” finance tip themselves.
So why is it so common for us to follow some random money tip that doesn’t take our own personal situation in mind?
I’ve coached hundreds, if not thousands, of individuals – be it from wealthy business owners to recent college graduates looking for new jobs – on how to be more successful in their everyday finance habits.
And surprisingly, I often see a very similar trend from those who have $1 to those who have $1,000,000: They allow too many cooks in the kitchen to water down their soup.
(I’m pretty proud of this analogy!).
The point here is this: Before eating the soup (investing your money in the latest, hottest stock for instance), make sure you listen to 1 or 2 main cooks (financial advisors) who truly know your diet (your personal financial situation).
Don’t simply do something for the sake of doing something.
Let’s go ahead and check out the 5 most common millennial money myths below!
Myth #1: You have to buy a House to be Financially Successful
How often have you heard people say that becoming a homeowner and owning real estate is the most important step toward becoming financially independent?
I’m not sure about you – but I’ve heard it plenty of times.
Maybe being a homeowner works very well for the financial situation of the person who just gave you that money tip.
But maybe being a homeowner doesn’t work for your personal situation.
I think one of the first things to debunk any unsolicited money tips is to question the money tip at hand.
As it relates to homeownership, first consider whether homeownership is the best option for you – personally, professionally, and financially.
What to ask yourself before buying a home:
- Do I have enough money saved for a 20% (the recommended amount) down payment?
- Am I at a point in my life where I am comfortable settling in 1 area for an extended period of time (5 years or longer – the typical breakeven period)?
- Is this an impulse decision?
There are always pros and cons to owning a home. I’ve listed a few, below:
|Home Ownership Pros||Home Ownership Cons|
Good Investment: Long Term
Very High Initial Costs
Build Equity: Long Term
Some Tax Benefits
High Maintenance Costs
Equity Growth takes Time
Potential Lower Monthly Payments than Rental Properties
Property Values can Fluctuate
Fixed Monthly Payments (Principal & Fixed Interest)
Potential for Credit Score Improvement
Potential for Foreclosure (which is really bad for credit score purposes)
Long Term Commitment
As you can see – homeownership certainly does not have all pros.
In fact, I could argue that homeownership has a lot of cons.
I decided to purchase my house as early as possible (I bought my first home at 23), for the following reasons:
- I had saved enough money for a down payment
- I loved the area and house I chose – located in Sunny Florida
- I found a stable, good-paying job – so I didn’t expect to move anytime soon
Everything just meshed for me.
It was the right decision.
Buying a house, in some way, is similar to finding a future life partner (don’t tell my husband I said that!).
But really – think about it: It’s an investment – and it’s certainly long term – and you have to make sure you LOVE it.
Having read my arguments for and against homeownership, maybe it’s time to consider renting as your option.
Below, I’ve posted several pros and cons to renting a house:
|Renting Pros||Renting Cons|
Potential Lower Monthly Payments than Homes
No Modifications to Rental Property
Repairs don’t Cost you Money
Equity is not Built
Potential for Rent to Increase
Low Initial Costs
No Potential for Credit Score Improvement
No Tax Benefits
Now that you have a decent understanding of the major pros and cons of renting versus homeownership, it’s time for you to do some internal digging to determine which living arrangement is best for you.
If you are considering purchasing a home, you should ask yourself 3 questions:
- What is your time commitment?
- Is it affordable?
- Why now?
Make sure you’re ready to make the move (no pun intended) to a home.
Let me explain a little further in-depth: Typically, you will want to purchase a home with a 20% down payment fee.
That means, if your house is worth $300,000 – it would be in your best interest to make an initial payment of $60,000.
If you don’t have an EXTRA $60,000 saved (remember – you cannot dig into your emergency savings fund for that cash – the down payment has to be taken from another account), then chances are a house of that value is likely not the house for you – which is totally OK.
What happens if you don’t pay the recommended 20% upfront down payment?
Assuming your mortgage is the conventional loan, you’ll be stuck paying PMI (private mortgage insurance) ON TOP of what you owe monthly.
Because PMI is a way for your lender to protect themselves in case you fail on making your monthly mortgage payments.
Chances are, PMI will cost you around 0.51% of your home value…
Don’t let that “small” number fool you.
Off of a $300,000 home, your PMI would be $1,530 per year – or $127.50 per month in addition to your monthly mortgage payments.
If you have a conventional loan (30-years) and you pay $1,530 per year on top of your regular mortgage payments – after 30 years, you’ll have paid an extra $45,900!
All because you didn’t make that original 20% upfront payment.
That’s not worth the overpayment in my opinion.
Here’s an easier way to break-down the PMI conversation:
That’s a big difference.
Imagine the difference over a 30-year time frame!
In 30-years, you’ll be paying $83,790 more dollars if you just made a 5% down payment versus if you had made an initial 20% upfront down payment.
Bottom Line: Make sure you’re financially fit to make that home purchase.
The 20% down payment is VERY important – if you maintain the same mortgage for the entire 30-year duration.
Two major factors to keep in mind:
- Buying a house is a long-term commitment (if you sell early, you’ll likely lose money)
- Buying a house requires a significant upfront down payment
Now it’s time for you to decide! Good luck!
Myth #2: Buying Life Insurance is a Waste of Money
How many of you have heard that buying life insurance is a waste of money?
That’s a pretty common money tip I hear – literally all the time.
Because people hate spending money on something where they won’t see a return.
And in life insurance – you literally will never see a return on your investment – because life insurance hinges on your death!
When you hear someone give you this money tip – staying away from life insurance – take it with a grain of salt.
Does that money tip actually mesh with your current situation?
When is life insurance not worth the investment?
- You have no debt
- You don’t have anyone depending on you
- You don’t have anyone to leave the life insurance money to
- You don’t have enough income currently to pay for the life insurance premiums
- You are not in good health (or have had a serious medical diagnosis recently) that could increase the life insurance premiums
As you can tell from the diagram above, life insurance is not always the answer to every person’s situation.
Now, when is life insurance worth your consideration?
- If you have children
- If you are young & healthy
- If you have debt you need to pay off
- If someone depends on you for income
- If you expect your income to increase in the future
- If you have the current income to pay for life insurance
Even if you are young and single currently – it might be worth considering purchasing life insurance now – just in the case you plan to enter a long-term relationship in the future.
The younger you are when purchasing life insurance, the lower the annual premiums will be.
Now keep in mind, there are several different life insurance products out there.
So, if someone says that life insurance is a waste of your money – that money tip may be relevant only for certain types of life insurance products.
Let’s check out a list of the common types of life insurance types:
- Whole Life Insurance
- Term Life Insurance
- Universal Life Insurance
- Variable Universal Life Insurance
As you can see from the chart above, there are many different products – and those are just the 4 most common types of life insurance.
Now, if you are young and healthy – then there is only 1 type of life insurance I would recommend for your purchase: Term life insurance.
Below are some reasons why term life insurance is considered the life insurance product for millennials:
- Flexible timeframe
- Excellent for young families
As the name suggests, term life insurance does not insure you for life, but rather insures you for a specific term.
This term can be 5, 10, 15, 20, 25, or 30 years.
My suggestion: I would suggest purchasing a 30-year term if you are a millennial.
That term should typically cover you for your working years – which is all the insurance you really need (since you have someone who is depending on you for income while you work).
Hopefully, these pointers help you better decide for yourself – and your personal financial situation – whether life insurance is the right thing for you.
Keep in mind that people handing out free money tips typically don’t consider your personal financial situation.
That’s what you have to do.
Myth #3: Saving can Wait for Tomorrow
Even when your budget is tight, you should not go for the “I’ll save tomorrow” mentality.
That’s probably the worst thing you can do to yourself, your family, and your bank accounts.
I know that most people don’t like waiting for decades to reap the benefits of their hard-earned money from today.
But guess what?
If you want to retire in style and not worry about running out of money, today is the best day to start investing for your future.
If you don’t save today, saving tomorrow will be much harder and more painful.
5 Reasons you Should Start Investing Today
Want to know why you should start saving and investing today?
Check out my reasons, below!
1. The Earlier you Start, the Less you Need to Invest
Time – and compounding interest – is your major advantage here.
If you invest when you are 20 years old, even if it’s $50 per week, you’ll be doing yourself a favor because you are taking advantage of time and the power of compounding interest.
Compounding interest may not seem like a large benefit now – but if you fast forward to 30 or 40 years from now, you’ll see a vast difference in your bank accounts.
Your investments have time to grow.
Your money basically makes money.
Below is an illustration that will show you how saving money early can literally change your financial trajectory – even if you save less from an earlier age versus more at a later age.
This assumes several scenarios:
- The interest rate is a constant for both investment strategies.
- Alex invests $5,000 annually ($27.50 per day) between ages 35 – 65 and then stops investing – total Lifetime Investments: $150,000
- Aria invests $5,000 annually ($27.50 per day) between ages 25 – 65 and then stops investing – total Lifetime Investments: $200,000.
As you can see, you should start investing early at all costs.
Even if it’s less than $27 per day.
Even if it’s only $5 per day.
Do it. Don’t wait.
2. You may have a Tax Advantage
Depending on the type of investment vehicle you select and your current personal financial situation, pre-tax or after-tax, you may have a tax advantage.
|Pre-Tax Investments||After-Tax Investments|
Deducted from Taxable Income Today
No Deductions from Taxable Income Today
Pay Less in Taxes Today
No Impact on Taxes Today
Pay Taxes in the Future, when Distributions are Taken
Do Not pay Taxes in the Future, when Distributions are Taken
For example, if you invest in a pre-tax vehicle, you won’t have to pay taxes on the contributions you make now (but you will have to pay taxes on the distributions you take from your account later, during retirement).
Conversely, if you invest in an after-tax vehicle, you will have to pay taxes on the contributions you make now (but you won’t have to pay taxes on the distributions you take from the account later, during retirement).
3. Starting a Savings / Investing Habit Today will Enforce a Healthy Financial Diet in the Future
It typically takes anywhere from 30 days to 66-plus days to enforce a healthy habit.
The earlier you start with a savings and investing habit, the more you will likely stick to this habit – even if times get tough.
If you have a deep-seated habit for saving and investing, chances are that you’ll continue your savings and investing strategy through the good times and the bad times.
You never allow a dollar to go to waste – and that’s one of the biggest benefits to starting saving early.
You build discipline.
And honestly, becoming a millionaire is all about discipline – and consistency.
Don’t ever miss a saving day.
Start building that healthy habit today.
4. Peace of Mind
If you invest and save today, you’ll likely save yourself a lot of stress down the road.
Did you know that relationships and marriages often fall apart for these 3 main arguments:
Don’t allow your financial management (or lack thereof) to dictate your relationship or your emotional and even physical health.
Start investing now – your health and wealth will thank you later.
5. The way you Treat $10 is how you will Treat $1,000
Your habits will likely not change how you treat $10 versus if it’s $1,000 or even $1,000,000.
If you know the value of a dollar and spend that money carefully, chances are you also will spend $1,000,000 with care.
You won’t blow your money on some impulse purchase decision.
Even though there is a significant difference in value between the 2 amounts of money, keep in mind that the way you handle your money says a lot about your character.
Myth #4: YOLO
Yes, you only live once (YOLO) – but do you want to live your life in constant financial stress, fear, and worry?
Not for me – and I think your future self would also thank you if you start saving for retirement.
Now: I’m not saying you should go ahead and save 90% of what you earn and live in destitution for 40 years of your life.
I’m saying balance and moderation are key – for both sides of the argument.
You shouldn’t save everything you earn for retirement – but you also shouldn’t spend everything you earn just because you’re afraid of passing away tomorrow.
Below are a few of my suggestions:
- Consider your annual income
- Designate around 10% of your annual income to be “fun money”
- Create a separate savings / investing account for your “fun money”
- Regularly contribute to that account
- Use the “fun money” account ONLY for your YOLO expenses
- Once the account is used up – don’t dip into other savings / investing accounts.
- You have to replenish your “fun money” account before you spend more on YOLO times.
The “fun money” method has helped me (and a lot of my friends) tremendously as it relates to lowering our YOLO expenses.
It’s not like I’m completely sacrificing my present happiness for future bliss – I’m living a life of moderation, and I love it.
Myth #5: Your Employer can Steal your 401(k) Money
Have you ever received the money tip that if you invest in an employer-sponsored retirement plan, your employer has the rights over your money?
Actually, I’ve heard it plenty of times with some of the young professionals I’ve coached.
It gets worse: They are young professionals, have bright futures ahead of them and are some of the smartest of their industry that claim this myth is accurate.
They believe that once you contribute to your retirement plan, your employers still have access to your money.
Let me debunk that money tip right now: MYTH!
For any qualified (and some nonqualified) employer retirement plans, you do not need to worry that the money you contribute from your own paycheck is able to be repossessed by your employer.
Below is a list of all Qualified Employer-Sponsored Retirement Plans versus Non-Qualified Employer-Sponsored Retirement Plans:
|Qualified Employer-Sponsored Retirement Plans (Profit Sharing Plans)||Non-qualified Employer-Sponsored Retirement Plans|
Non-Governmental 457 Plans
Employee Stock Option Plan
Non-Qualified Stock Options
Incentive Stock Options
Employee Stock Purchase Plan
Deferred Compensation Plans
Governmental 457 Plans
SIMPLE 401(k) Plan
Aside from a bunch of tax rules and guidelines, qualified employer-sponsored retirement plans are much more common.
Here’s the deal: If you have a nonqualified, non-governmental 457 plan – then your money and investments may be subject to your company’s creditors.
In Plain English:
If you work for a private corporate (a company that does not work for or with the government) and are investing in a 457 plan, if your company goes bankrupt then the people that your company owes money to have access to your retirement funds.
Does that scenario happen often?
No. But it’s something you should be aware of.
Now that we know that your money is 90% safe in an employer-sponsored retirement plan – there is no need to wait.
That said: if you start investing in an employer-sponsored retirement plan, your employer may offer a matching contribution (that’s basically free money).
So if you contribute $1,000 in your 401(k) plan, chances are your employer will contribute $1,000 also.
Typically, the rule of thumb is that your employer can match your contributions using 1 of multiple techniques (the 2 most common are listed below):
- A 100% match of deferrals up to 4% of compensation
- A non-elective contribution of 3% for all eligible employees
Keep in mind that there are these things are known as vesting plans.
Vesting plans typically cover a 5-year or 6-year period of employee service.
Let’s use the following example:
- An employee has worked for a company for 1 year and was just fired
- The employer contributed $1,000 to the employee’s 401(k) plan
Below is a chart illustrating how a typical vesting plan goes (there are 2 types of vesting plans):
Cliff Vesting – Percent of Employer Contributions that Employee will lose if Employee Leaves within a certain period.
Graded Vesting – Percent of Employer Contributions that Employee will lose if Employee Leaves within a certain period.
|Years of Employment||Cliff Vesting||Graded Vesting|
So if someone gave you the false money tip that you’ll lose the money you invest in an employer-sponsored plan – chances are they are incorrect.
Let’s give them the benefit of the doubt and say that they were referring to the money that was contributed by your employer.
And there you have it, folks!
Those are some of the most common millennial money myths.
I think the big picture is this…
…To be successful financially, there are several things you want to accomplish:
- Be patient
- Be consistent
- Be disciplined
- Maintain a long term mindset
- Don’t always follow the masses
- Physically write down your financial goals
In reality, finance is so much more than just money and numbers.
Finance is about mindset, your relationship with money, and your ability (or lack thereof) to handle the stress of the stock market.
If conquering all things related to finance were easy, then everyone would be successful.
Stay patient – and focus on the long-term goals.
With time – and with practice – you’ll become even more successful than you are now.
Your bank accounts will thank me later!
What common millennial money myths have you heard before?