“No, I don’t consider myself an investor.” According to a recent study by Fidelity, that’s the answer you’ll get from 91% of millennials even though 63% of them have some kind of investment account. Clearly there’s a disconnect here, and it’s causing millennials to make some serious investment mistakes, ones that will ultimately influence their ability (or inability) to retire at a given age.
As a professional millennial investor and investing educator, here are the top 7 investing mistakes I see millennials making:
#1 – Not starting soon enough, or not investing at all
According to the above statistic, this doesn’t seem entirely true. 63% of millennials supposedly have some kind of investment account. I’d hazard a guess, though, that the bulk of those accounts are either retirement plans they’ve been auto-enrolled in, or investing apps they’ve downloaded and toyed around with. So it’s not that they’re not starting, but rather that they’re not starting with intention. And that means they’re not intentionally harnessing the greatest asset they have: time.
When it comes to investing, especially for retirement, you need to know that you’re contributing enough to meet your goals and take advantage of compound interest. To figure out how much you should be contributing, check out my video on contributions and my bonus reverse retirement calculator tutorial. Remember, thanks to the power of compound interest, every dollar you make and invest today turns into multiple dollars you don’t have to work for in the future.
#2 – Letting a lack of knowledge hold you back
I was talking to my friends the other day about why they aren’t investing. My friend, Chris, said “Even though I’ve saved with the idea of investing or putting it toward retirement, I don’t feel confident in my limited knowledge of personal finance. That’s not a good excuse, but to this point, it’s prevented me from taking action.” While we’re very much a DIY generation, when it comes to investing, most millennials assume it’s over their head. It’s not, you just need someone to break down the concepts for you and present them in a logical order.
If you’re entirely new to investing, check out my first unit THE BASICS to get a simple overview of the stock market. To learn how your retirement account works, check out my second unit, YOUR 401(k).
#3 – Assuming you can’t afford to invest
Given the amount of student loans millennials are graduating with, this one’s understandable. When you’re staring at a massive pile of debt, a host of new, big living expenses, and social pressures, it’s easy to think you can’t afford to invest. YOLO and FOMO creep in too, causing you to spend more than you should. The key here is to pay yourself first. Most people save what’s left after spending, but you need to get in the habit of doing the opposite. Save and invest first, then spend what’s left.
#4 – Choosing to contribute a fixed dollar amount instead of a percentage
When filling out your 401(k) enrollment form, you can choose between a set dollar amount or percentage. It’s easy to think “Eh, 300 bucks per month sounds good.” What you should do, though, is convert that number to a percentage. For example, if you’re making $36,000 per year, that’s $3,000 per month, and $300 is 10% of that. Selecting a percentage means that when your salary increases, your contributions automatically increase as well. This will help you avoid “lifestyle inflation”, or spending more money when you make more money. Additionally, make it a goal to increase that percentage by 1% each year, with the ultimate goal of contributing 15-20% of your income annually.
#5 – Not knowing the difference between a traditional and Roth account
The choice between traditional versus Roth typically boils down to a simple check box on your enrollment form. Unfortunately, that severely oversimplifies and demeans the importance of the decision, especially at a young age. You can learn more about the differences and how to choose which one is right for you in this video post, but here are the basics:
Traditional contributions go into your account pre-tax. You don’t pay any taxes on that money today, but you’ll owe taxes on it and the investment earnings when withdraw money in retirement. Roth treatment, however, allows you to contribute money to your account after-tax. So you’ll be taxed on that money today just like normal via your paycheck, but you won’t owe any taxes on it or the investment earnings. That means your dollars get to grow entirely tax-free for decades, and you get to keep the full benefit of compound interest for yourself.
#6 – Not maxing your employer match
Does your employer offer a match? That’s FREE MONEY, people! If you’re frugal and/or apprehensive about investing, you should be allll over this! It’s the only guaranteed “return” on your money that you can count on, and it can have a serious impact on your retirement savings. For example, if your employer offers to match you dollar for dollar up to 5%, that means they’ll put in a dollar for every dollar you put in up to 5% of your income. If you’re making $40,000 per year, 5% of your income is $2,000. That’s 2,000 FREE DOLLARS! Over 40 years at a conservative 5% return, that’s an additional $255,679 in your account. Just for doing what you should be doing anyway – saving for retirement! Crazy, right?
If you’ve got a match, make sure you’re contributing enough to max it out. Don’t just assume you are, especially if you’ve been auto-enrolled in your account. Do the math!
#7 – Being too conservative
Having grown up witnessing two major crashes, millennials are wary of investing in the stock market. However, stocks have generated superior returns over long periods of time and are the place to be if you want your hard earned money to work for you. Rather than shying away from risk, millennials need to embrace it. As the old saying goes, with risk comes reward, and that saying holds true for a well diversified portfolio.
The younger you are, the more risk you should theoretically be willing to accept. While the market may dip in the near term, consistently contributing to your account should pay off handedly over time. As you get nearer retirement, you can start shifting some of your portfolio from higher risk/higher reward assets like stocks to lower risk/lower return assets like bonds.
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My fellow millennials, I know that investing and the stock market can seem entirely out of your control. Luckily, with a bit of effort, you can control the seven factors listed above. To get started, download my comprehensive DIY Guide for Your Retirement Account, which takes you step-by-step through your account, including some simple calculations to make sure you’re on track. Click here to get your FREE copy.
About the Author – Tara Falcone is a former investment analyst and the Founder of ReisUP. She left Wall Street to share her investment knowledge with people who need it, like her friends and family. By breaking down complicated investment topics into easy-to-understand, bite-sized chunks, she hopes to empower you to “rise up” and take control of your financial future.
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