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Despite being strapped with student loan debt, millennials are surpassing older generations when it comes to money management habits like saving and budgeting, a recent Bank of America survey shows.
According to the Better Money Habits Millennial Report published earlier this year, 63 percent of millennials (ages 23 to 37) are saving. Fifty-seven percent say they have a savings goal, as compared to the 42 percent of Gen Xers and 42 percent of baby boomers who also say they have savings goals. And the majority of millennials with savings goals are not all talk—67 percent meet their set goal.
“Young adults deserve more credit—from others and themselves—for the way they are handling their finances,” says Andrew Plepler, global head of Environmental, Social and Governance at Bank of America. “They’re on par with or even better than older generations, which defies common stereotypes.”
But to stay on the right track, there are financial missteps that millennials should learn to avoid that older generations have grappled with, says Richard W. Paul, president of Richard Paul & Associates LLC and author of The Baby Boomers’ Retirement Survival Guide: How to Navigate Through the Turbulent Times Ahead (Createspace, 2013).
“Certainties the older generation had and hung onto have mostly evaporated, which makes it incumbent on young people to educate themselves, avoid those pitfalls, and make better decisions in a far more uncertain world,” Paul says.
Here are the four financial pitfalls young buyers can take to heart.
- Buying too much house. Especially in today’s market when homes are going fast, it might be easy for your millennial clients to go over budget, so stick to showing them houses in their price range. “This is such a trap young, successful people on the way up fall into,” Paul says. “You have a higher mortgage and property tax, and it stretches you too thin, leading to credit card debt and generally putting you behind at a time you should be getting ahead.”
- Cashing out a 401(k). Everyone’s financial situation is different, but some home buyers might be tempted to dip into their retirement savings to purchase a property. While a first-time buyer can take a $10,000 distribution without incurring the 10 percent tax penalty, that money will be added to their federal and state income taxes. If they’re not a first-time buyer or they take out more than $10,000, they’ll be dinged with the tax penalties.
- Overlooking rental property investments. Some younger buyers might not understand the return on investment or are overwhelmed by the prospect of managing a rental property. However, Paul says, “buying rental property at a young age can be a smart investment, cushioning for retirement because it provides steady, inflation-adjusting income.”
- Counting on Social Security. “Many baby boomers counted on a future stream of income from Social Security, a pension, or both, starting around age 65 and continuing for the rest of their lives,” says Paul. “But those retirement benefit programs didn’t count on people spending 30-plus years in retirement, which is becoming more and more common.” Millennials are already generally on a smart savings path, according to the Bank of America survey. What’s more, a report from Transamerica Center for Retirement Studies shows that millennial workers are saving at earlier ages than previous generations. When your clients are working on their homebuying budget, they should leave enough room to be saving 15 to 20 percent of their income now, Paul says.
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