5 Financial Mistakes Newly Earning Millennials and Gen-Z Should Avoid

The road to financial independence is not a cakewalk and requires patience with diligence, especially at the beginning.

For any individual, embarking on the professional journey and earning a first paycheque is a significant milestone, and it gives access to your hard-earned income. You see, earning your own money comes with the responsibility to manage your finances wisely. While it is tempting to indulge in impulsive spending and instant gratification, it is crucial to strike a balance between enjoying your earnings and planning for the future. As a young earner, it is essential to understand the value of money and the importance of wealth creation.

The way young generation manages money is in stark contrast to the way it's previous generation did. There are a variety of challenges that a youngster encounters that the previous generations did not. When compared to their parents or grandparents, millennials and Gen Z have distinct financial habits, goals, and hurdles, including the costs associated with student loans, fast-rising rents, a less stable job market, and a high inflationary environment.

Consequently, it is prudent that young earners (millennials and Gen Z) must start focusing on smart financial planning as soon as they begin earning their own income. However, making the wrong money moves early on in your financial journey can be costly. Being able to handle your money wisely entails more than just making ends meet. You don't need a lot of experience or to be a math genius to handle your money wisely. To thrive in a world of competition and uncertainty, millennials and Gen Z must avoid making financial mistakes that could take a toll on their financial future.

Let's us understand what are the common financial mistakes that young adults should avoid at an early stage of building their financial lives:

1. Not Focusing on Savings

When you begin earning, you gain access to your own funds. While it is fine to celebrate your first job and the revenue it brings in, it is also crucial to be mindful of impulsive spending. Young adults frequently underestimate how much money they can save on housing and food and how overspending might interfere with other financial goals. Avoid splurging on pricey luxury products like designer clothing and high-end smartphones. Avoid purchasing your own car immediately after starting your first job; instead, create S.M.A.R.T. financial goals (long-term or short-term) and save to achieve them.

Avoid falling prey to lifestyle inflation, which occurs when luxury items become to be seen as a necessity. In today's tech-driven world, social media creates the desire to keep up with others. The fear of missing out has led millennials and Gen Z's to spend the majority of their income on items that provide them stature and instant gratification. Instead, you must practise delayed gratification and enhance your savings.

You may improve your savings by creating a personal finance budget, and you can get perspective on your spending by understanding your income and how your monthly expenses add up. You may decide on how you can eliminate your unnecessary spending after you have a budget and an understanding of your cashflows. The best method to start saving consistently is to stick to your budget; if you don't have one already, make one as soon as possible. The various online budgeting apps may be taken into consideration by the tech-savvy generation to manage their cashflows.

[Read: 5 Simple Steps to Create Your Personal Finance Budget for 2023]

One must prioritise saving money regularly, even if it is just a small amount. Ideally, 10% of your paycheque should go into your savings account, and 10% should go into your emergency fund. This will help you build a financial cushion to protect from any unforeseen exigencies. Setting aside money each month to cover life's surprises will help you make good financial decisions and make dealing with emergencies less stressful.

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2. Not Investing for Your Future

Savings at the exclusion of investing can prove problematic; investing grows your money in a way that savings cannot match. Given the effects of inflation, it is wise to invest in worthy avenues that may help you generate inflation-beating returns and may prevent losing the value of your hard-earned money.

Many millennials have put off investing, either because they don't have the knowledge or because they don't think they have enough money. It's not how much you invest it's how regularly you invest; no matter whether your investment amount is small or huge, investing regularly will assist you in wealth creation over the long run.

Often, youngsters tend to believe that they should enjoy the money they earn during the initial years rather than focusing on saving and investing. The fact remains that if they start saving and investing at an early age, they get into a disciplined financial life and benefit from the power of compounding. Now, where to invest is also an important aspect to understand for a novice investor.

Young adults have time in their hands, which makes it convenient for them to invest in equity mutual funds that are risky in nature but are also known to offer significant returns in the long term. However, before investing in any asset, one must ensure their suitability based on risk profile, investment horizon and objectives. Investing in equity mutual funds through Systematic Investment Plans (SIPs) is an ideal option for young novice investors, as it is lighter on your wallet and instils a habit of investing regularly.

[SIP Calculator]

3. Not Taking Debt Management Seriously

Millennials and Gen Z have also been known to struggle with managing their debt. Credit cards are made widely available with attractive offers targeting young earners, and many are tempted to use them without understanding the full implications.

Getting auto-debited for subscriptions and updates on the credit card and not bothering to check, spending every week on hair and nails, online shopping, weekend dine-out with friends etc., on just a swipe could make you land in the web of credit card debt without realising it. As a result, frequent use of credit cards has found many millennials in debt, leading to financial hardship. It would help if you be mindful of how you use your credit cards.

Additionally, many youngsters take education loans to fund post-graduation. Having debt is not bad, but timely repayment is extremely important. There could be an initial moratorium period while you are pursuing the course; however, when the loan becomes due, it is your responsibility to pay off the EMIs on time. One should endeavour debt reduction with the help of windfall income; in case you receive an annual bonus, try to pay off a part of your education loan to reduce the debt burden. Also, having poor credit habits, such as not paying off dues on time, can cause the credit score to go down, which can lead to difficulty in access to loans and other financial products in the future. Try to maintain the debt-to-income ratio below 40% to prevent any harm to your financial well-being.

4. Inadequate or Zero Insurance Coverage

It's common for youngsters to think they do not require insurance coverage at this age. However, the pandemic has shown how there is a threat to life and health in today's uncertain world, no matter your age.

Anyone could need medical care at any point in life; thus, a good health insurance policy is crucial to assist with the required expensive medical treatments. Similarly, adequate term life insurance is essential to protect the financial future of your loved ones, as it helps fulfil their financial needs in your absence (unfortunate demise of the sole breadwinner of the family). Insurance is the shield one needs before one can stabilise financially and have enough wealth that can replace their income. Without that, the financial status remains precarious and severely exposed to risks of unknown events.

Thus, do not make the mistake of neglecting an insurance cover; you must ensure purchasing an adequate insurance cover and pay attention to the calculations your insurance agents present to you as sales pitches. Your insurance coverage should be based on your suitability and must cover your financial needs.

5. Delayed Retirement Planning

Putting off your retirement plan is one of the most common mistakes young adults make. For millennials and Gen Z still trying to establish their careers, focusing on retirement or saving for the long-term future may not seem like a top priority.

While retirement may seem far away, it is essential to start working on your retirement plan as early as possible. Planning for retirement is about finding a balance between putting money aside for later and having enough to pay for stuff now. Thanks to compound interest, even modest amounts of savings will grow better over long stretches of time and provide you with a wealthy retirement corpus for your golden years.

Apart from this, millennials and Gen Z should take the time to understand the basics of personal finance. This will prevent the lack of understanding of tax deductions or refunds, the concept of compounding interest, the importance of portfolio diversification, the cost of inflation etc. Thus being aware of money management concepts is imperative for young adults to be able to understand and manage their finances better. Learning about investing and allocating their hard-earned money into stocks, mutual funds, or other investment vehicles that align with their goals is crucial.

In conclusion:

Start financial planning early and work towards achieving your financial goals gradually over time. With the help of this article, you may avoid making any such financial mistakes as you start earning in order to have a secure financial future.

MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.

She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.

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Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.