You’re young, fresh out of college and working your first real job. You might think you have plenty of time to worry about saving for retirement, building a strong credit score and creating an emergency fund of cash.

But here’s the truth: Financial mistakes in your younger years could haunt you in your 30s, 40s and 50s. That’s why it’s so important to avoid some of the bigger errors millennials tend to make.

Here’s a look at some of the new generation’s more common money blunders and why they’re so potentially harmful.

Not Building an Emergency Fund

Frank Shields, founder and director of financial planning at Houston-based Future Map Financial, said the top mistake of millennials is not building an emergency fund.

An emergency fund, as its name suggests, is an account reserved to cover the costs of unexpected expenses – anything from a last-minute car repair to an unplanned medical procedure. Most financial experts recommend you have enough cash in your emergency fund to cover three to six months of daily living costs.

“Nothing might be scarier than losing your source of income,” Shields said. “That is why it is a mistake to not have emergency cash on hand.”

If your monthly expenses total $4,000, you’ll need anywhere from $12,000 to $24,000 in your emergency fund. That may seem like a lot, but you can always start small. Even if you only put $200 a month away, you’ll have $2,400 after a year.

Racking Up Too Much Credit Card Debt

Sharon Marchisello, author of the book Live Well, Grow Wealth and a resident of the Atlanta suburb of Peachtree City, Georgia, said millennials who use credit cards properly can steadily build a strong credit score. The key, though, is that word: properly.

It’s OK to make regular purchases with your card as long as you pay off its balance in full each month. In fact, doing this is one of the best ways to gradually increase your three-digit credit score.

Too many millennials, though, run up credit card debt without ever paying off their balances. They then have to pay far too much credit as they continue to make only the minimum monthly required payment. Instead of using their cards as a credit-boosting tool, they treat them as magic wands to make purchases they can’t really afford, Marchisello said.

“Once you start carrying a balance,” he added, “every new purchase accrues interest, so you’re paying a surcharge on everything you buy.”

Overspending on a Home

Robert Johnson, professor of finance at the Heider College of Business in Omaha, Nebraska, said millennials should not go in over their head when it comes to the desire to own a home.

“You should absolutely not purchase a home that’s either over your budget or right at its top. That will result in a monthly mortgage payment so large it will constantly strain your household budget,” said Johnson. “By overinvesting in real estate, many millennials crowd out other investment opportunities, like stocks and bonds,” he noted.

The Frequent Splurges

That first salary can seem pretty impressive to millennials. This might explain why so many of them start splurging as soon as they land their first steady job. Instead of building their savings, they purchase expensive furniture or costly flat-screen TVs, or blow their income on an expensive car or a long vacation.

Patrick Zulueta, head of public relations and communication for financial app Cashalo, said he sees this firsthand with his company’s younger employees. Their friends are constantly inviting them on weekend vacations. There are always trips to the bar or the new restaurant in town.

All that splurging can shrink millennials’ bank accounts, he said.

“This will eventually haunt them after they figure out that it’s better to start saving or investing while they’re young,” Zulueta said. “Sure, going to parties is fun, but it should be kept to a minimum. Better to start putting away money for their future.”

Zulueta recommended that millennials cut that first salary into portions. They should save 30% of their salary every month. The remaining 70%? That can go to bills, daily needs and entertainment.

Not Saving Early Enough for Retirement

Kameron Helmuth, vice president and wealth management advisor with Fort Wayne, Indiana-based State Bank, said it’s easy for millennials to view retirement as a long way away. But those who don’t start saving for it at a young age are making a big mistake.

For example, many millennials don’t enroll in their employers’ 401(k) plans, costing them several valuable years of retirement savings.

Helmuth gave this example: Say you take a position with a company and are earning $40,000 a year. And say this company offers you a 401(k) with a 3% match for the first 3% of earnings you contribute. If you put off enrolling in this plan for just five years, you’d end up losing more than $250,000 in your retirement account by age 65.

“My best advice for savings as a millennial is to start by setting a savings goal and sticking to it, no matter how small,” Helmuth said. “The exercise of setting a goal and accomplishing it does wonders for our confidence and morale.”

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This Post Has 2 Comments

  1. “What first-time home buyers should know is that residential real estate historically has not been a very good investment.” Wow. Historically residential real estate has been an awesome investment. You really discredited yourself in a hurry.

    1. Hi Dennis:

      You’re of course right that real estate has historically been a very good investment. We even have other posts that show detailed analysis saying so. As a mortgage company, we believe that housing can play a big role in anyone’s financial portfolio. Housing typically outperforms inflation, sometimes by several percentage points. This is not to mention the passive income you can earn from rental properties.

      This was a failure of our writing and editing process and we’ve reworded the section. While we don’t want anyone spending beyond their means for a home, it can obviously be an excellent investment. We’ll be better in the future. Thank you for taking the time to point this out!

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