These mistakes cost you big money.
Three in four people admit to making at least one financial mistake, according to a survey of more than 1,000 adults conducted by Harris Poll on behalf of TD Ameritrade. But what people consider to be a major money mistakes differs by age.
When asked what they considered a major money mistake, the No. 1 answer for millennials was not socking money away in an emergency fund (41% considered that a major mistake). Meanwhile, the No. 1 answer for both boomers and members of Generation X was not investing in a 401(k), with 56% of Gen Xers and 65% of boomers listing this as a major mistake.
Meanwhile, just 33% of millennials listed this as a major mistake, putting it sixth on the list behind things like keeping financial secrets from a spouse or partner and having a low credit score.
The reason, says Wende Rhodes, a vice president of branches at TD Ameritrade, may be that we “focus on right ahead of us.” For Generation X and boomers, that thing is retirement, while for millennials “it feels like retirement is a long way off,” she adds.
Research suggests that we often have a hard time identifying with our future selves, and thus may have a harder time saving money for the future; one study that allowed people to see renderings of themselves in old age showed that looking at these images could help people save more. “The way to think of this is to think of your future self,” says financial planner Mitchell C. Hockenbury of 1440 Financial Partners in Kansas City, Mo. “Our future self really would enjoy a comfortable retirement: one where we no longer work 40+ hours a week. Instead we enjoy spending time with friends, family, hobbies. Our future self would love to not worry about debt.”
Whatever the reasons, it’s essential to understand that for many people not contributing to a 401(k) is a very costly mistake. Putting away even a small amount when you’re young can add up. For example, deposit $2,500 in your 401(k) now, never add another dime, and if you earn about 6% a year, you’ll have more than $8,000 in 20 years and upwards of $14,000 in 30 years thanks to the magic of compound interest. Of course, $14,000 isn’t going to cut it in retirement, but the idea is to consistently put money away and invest it so it can grow.
What’s more, if your company matches funds, this is “one of, if not the only game in town where you can get a guaranteed 100% return on that matching amount, if/when you vest. So if you don’t fund your 401(k) to the amount your employer matches, you may be losing out on doubling your money,” explains certified financial planner Bobbi Rebell, host of the Financial Grownup podcast, who notes that some do have lower matches. “Even in the best years, the stock market isn’t going to come close. Plus you get to lower your taxable income, and therefore the impact on your take home pay will be far less painful that any taxable investment at that time.”
Of course, saving for your emergency fund — millennials’ No. 1 choice for a major financial mistake — is also important. Without one, “you leave yourself vulnerable,” Rebell notes. A Bankrate survey released this year found that if hit with an unexpected $1,000 expense, more than half of Americans wouldn’t have the savings to cover that. Fully 15% would slap that expense on their credit card — which can be incredibly costly thanks to high interest rates.
TD Ameritrade’s AMTD, -0.46% Rhodes says these discrepancies in what people of different age groups consider major money mistakes may be an opportunity for those of different generations to open up a conversation on the topic. The younger generation, for example could learn a lot about saving for retirement from boomers. “That’s one situation where we don’t want to learn from our own mistakes. We want to try to avoid that [not putting money in a 401(k).”
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