Top millennial financial pitfalls, and how to avoid them

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Top millennial financial pitfalls, and how to avoid them

Millennials don’t really get enough credit for how hard they have it, financially speaking.

When it comes to millennial challenges, most "experts" flippantly equate Snapchat and participation trophies with laziness, unrealistic expectations of job fulfillment, and procrastination when it comes to milestones like buying a house or having kids.

But that’s overlooking all of the challenges that young people face. Some were becoming independent in the middle of a historical economic crisis. Some narrowly missed the Great Recession but were (and are still) saddled with record student loan debt. And still other millennials are facing stagnant wages and improving-but-stale job prospects. It can be difficult for them to even look at their financial situation holistically.

Financial challenges can be a huge burden to millennials, especially when those challenges are beyond their control. But that doesn’t mean millennials have to fall victim to every hurdle that comes their way.

We asked two millennial personal finance experts – Stefanie O’Connell, author of The Broke and Beautiful Life, and Chelsea Fagan of The Financial Diet – about the biggest financial challenges faced by millennials today, and what tools they can use to avoid them.

Parents just don’t understand (the financial challenges millennials contend with)

This isn’t your father’s economic climate. It’s easy to get advice from your elders, but it doesn’t always help if they don’t know what exactly their children are going through. Stefanie describes the perfect storm of rising student debt and cost of living, declining earnings, and a reliance on an unstable gig economy:

First and foremost, student loan debt, millennials are contending with record student loan debt averaging over $37,000 for graduates of the class of 2016 – a rise of nearly $19,000 in just the past fourteen years.

Meanwhile, average earnings are in decline. In 1970, 92 percent of U.S. 30-year-olds earned more than their parents earned at age 30. Today, that number is around 50 percent adjusted for inflation.

All the while, costs of living continue to rise. 1970 the average American home could be purchased for about $150,000 in today’s dollars. Today, that same average American home costs about $384,000.

And in the aftermath of the recession, with the rise of the gig economy, millennials increasingly lack access to long-term financial infrastructure. Forty-one percent of millennials who are at least 22 years old have no access to either a defined contribution plan or a traditional defined benefit plan through their employers, compared with just 35 percent of Gen Xers and 30 percent of baby boomers.

Today’s financial climate can be overwhelming

All of those mounting challenges work together to do one thing: make millennials apprehensive of making any first step, in case it’s the wrong one. Chelsea sees this as one of the biggest mistakes visitors of The Financial Diet make:

By far the most common financial pitfall we've seen them make at The Financial Diet is putting their head in the sand, about their credit score, their debt, their net worth -- basically anything that scares them, they often choose to avoid.

No one wants to see that their credit score isn’t what it could be, or open yet another letter or email from a collections agency. Out of sight, out of mind, right?

But not tackling these issues head-on can make things worse. Chelsea also notes that one of the most popular topics among the people she advises is emergency funds. If millennials don’t take account of their debts, goals, and struggles (and who can blame them for not wanting to dwell on that?) then it’s harder to put safety nets like emergency funds and insurance in place to protect themselves.

What tools can millennials use to help them navigate their finances?

Luckily, millennials don’t have to face these pitfalls alone. There are a number of apps and tools available to help no matter the financial situation. We’ve written before about apps for budgeting, like You Need A Budget, along with apps for banking, retirement planning, investing, tracking receipts, taking notes, and more; you can find them here.

One app that Stefanie finds personally beneficial is Personal Capital, a tool we’ve talked about in the past. Here’s what Stefanie has to say about the retirement planning app:

A lot of the financial anxiety experienced by millennials isn’t a result of bad money behaviors so much as it is a result of fearing the unknown.

To combat this, we can help millennials reframe their approach to their finances and come to see money as a tool for grounding their aspirations in tangible, measurable terms – rather than a limitation.

To get to where they want to go and draw the roadmap for getting there, they have to take stock of where they are in the present. An app that tracks their spending and net worth over time like Personal Capital is a great tool. Once they have a comprehensive understanding of where they’re starting from financially, they can identify what they need to tackle first to get to where they want to go, and track their progress along the way.

Automate everything

Not dealing with money challenges is a surefire way to exacerbating them. But automating your finances is different. It takes some of the manual work out of investing, saving, and paying off debt, but rather than hiding from them you’re making them easier to handle.

Automating your finances and paying yourself first are crucial steps to taking control of your financial future. Knowing that your financial obligations are taken care of – without having to do it yourself every time – can relieve a lot of stress, as Chelsea explains:

Automating all savings and bill payment. Automate whatever you want taken out of your check before you see the money, and automate the bills that must be paid each month (ideally through your credit card, which you automate paying off, building credit & points). Setting financial obligations on auto-pilot makes it less a source of stress, and less likely to bite you in the ass when you inevitably forget something.

Financial pitfalls don’t have to be dead ends

Managing money can be hard when it seems like the deck is stacked against you. But even though millennials might have to work a little harder and a little smaller to plan their financial foundation, that doesn’t mean it can’t be done. By being aware of the challenges you face, knowing how to face them, and having the appropriate tools to manage and automate your finances, you’ll have the peace of mind to make the most out of any financial situation.