Folks who grew up in the Depression Era are labeled as “The Greatest Generation” but for millennials who are struggling to make it in a post-recession economy, the Brokest Generation might be more appropriate. Approximately 1 in 5 adults aged 18 to 34 are living at or below the poverty level, according to the Census Bureau.
Some of the most common money traps that millennials tend to fall into deal involve their biggest expenses, such as housing, transportation and health care. For some 20-somethings, however, it’s that desire to spend their money on experiences that gets them into trouble. If you’re trying to get a better grip on your finances, here are the four biggest expenses you need to avoid.
Even though housing prices and mortgage rates are still relatively low, only a relatively small number of millennials are taking the bait. According to Trulia about 13 percent of young adults aged 18 to 34 own a home, which means the vast majority are either living at home with Mom and Dad or opting to rent instead. While renting frees them up from some of the hassles of home ownership, it’s not exactly friendly to their wallets.
Rental rates have jumped by more than 25 percent since 2000 and with demand at an all-time high, they’re not likely to dip any time soon. Millennials are feeling the pinch and a 2015 consumer survey from Elite Daily shows that 96 percent of them are spending up to half their income on rent. That’s significantly more than the 25 percent that MyBankTracker recommends spending on rent.
When you consider that the average annual salary for new grads is around $37,000, that doesn’t leave them much wiggle room to tackle their other expenses, like that burdensome student loan debt.
Moving to a cheaper city can cut down the cost but getting a roommate is an easier solution. Which side you fall on in the roommate or no roommate debate is really a matter of personal preference but 77 percent of millennials included in the Elite Daily survey are open to the idea. On top of splitting the rent, you can also divvy up the utility and grocery costs to reduce spending even more. If you’re not sold on sharing your personal space, just remember that it doesn’t have to be permanent. Taking on a roommate for even six months can be enough to give you some breathing room and save extra money.
Tip: Use apps like Venmo or RentShare to make splitting expenses with your roomie hassle-free.
Owning a car can create its own set of financial headaches, especially if you’re constantly forking over big money for repairs or you do a lot of driving, which ups your fuel costs. It’s an even bigger pain when you’re shelling out big money for a car payment each month, but that’s just what a lot of millennials are doing.
Young adults account for about 12 percent of new car sales and that number is expected to grow to 40 percent over the next five years, according to AutoTrader. A 2014 survey from Deloitte found that more than half of millennials are okay buying a car without trying to negotiate the price and 44 percent would be willing to pay a dealer to pick up their car for repairs rather than looking for a cheaper garage or attempting to fix the problem themselves.
Obviously, going with a used car and paying cash is the smartest way to make the most of your dollars but if you’ve got to borrow, it pays to shop around before you decide on a lender. Check with your bank first and then start feeling out other banks or credit unions to see who’s got the best rates. When you’re browsing the car lots, don’t be shy about asking for a discount. General Motors and Nissan, for example, offer special savings incentives to college grads which can bring down the final cost of buying.
3. Overspending on ‘fun’
It’s no secret that today’s 20-somethings have a reputation for valuing experiences ahead of things and according to the survey, as much as 75 percent of millennials are willing to part with a fifth of their earnings to have a good time. Even though they’re stuck paying money hand over fist to their student loan servicers, they still manage to scrape up the cash for concert tickets or vacations with friends.
Having a good time without breaking the bank means prioritizing what you want to do and developing a smart spending strategy. For example, if visiting exotic places is your thing, using a travel rewards card to fund your trips is a smart move. Depending on which card you choose, you could earn points or miles that you can use for free flights, hotel stays, rental cars or vacation packages.
A cash back rewards card is also a good choice if you prefer to enjoy yourself closer to home. You’re basically getting a discount every time you use the card so it’s an easy way to save if you’re going out to dinner with friends or checking out a show. The only catch is that you have to be committed to paying the balance off in full each month. Otherwise, any savings you’re going to see will get eaten up by the interest and finance charges in no time.
4. Health insurance
Young adults who are making the transition from their parents’ health insurance to their own coverage need to be comparing plans carefully to make sure they’re not paying more than they need to. If you want to be able to choose which doctors you see, then an PPO plan is the way to go since an HMO usually restricts where you’re able to get care. The trade-off, however, is that an HMO plan is generally cheaper.
Someone who’s relatively healthy and doesn’t anticipate getting sick very often should look into a high-deductible plan. Your premiums are usually a lot lower but you’ll shell out a little more to meet your deductible before your coverage kicks in. For 2015, the minimum deductibles are $1,300 for individual coverage and $2,600 if you’re married or have kids.
If your employer offers a high deductible insurance plan, don’t forget to ask about a Health Savings Account. This is a special type of account that you can use to save for future health care expenses but it can also double as a retirement account if you don’t have access to a 401(k) or IRA.
As of 2015, a single filer could defer up to $3,350 of their pre-tax income into an HSA. The money rolls over until you need it and you can write off your contributions at tax time. You don’t have to itemize to deduct the money you put in, which is great for 20-somethings who would typically take the standard deduction anyway. If you’re able to participate in an HSA, there’s no reason you can’t use it to get a jump start on retirement.
If you’re guilty of doing any of the things on our list, it’s not too late to turn it around. Sometimes, all it takes is rethinking the way you spend your cash so you’re not repeating the same bad decisions. Addressing some of the bad money choices you’re making now can keep them from haunting you into your 30s, 40s and beyond.