Let me clear something up from the get-go, EVERYONE makes financial mistakes. However, now that the age of technology is in full bloom and the resources we have available to us are transitioning, the mistakes that people make are beginning to transition as well.
Pair this transition with the complete and utter lack of financial education that is failing to be given by just about any school or education system, and we are set up for failure.
Not any more.
Today I’d like to discuss the largest key issues I see occurring among millennials in terms of finances. I’m targeting millennials because they are in the perfect position to benefit from these key points.
You see, millennials still have the time to benefit from compound interest to the fullest extent, yet also have the resources to benefit a bit of extra investing in the current moment.
The truth is, if I’m no consulting, I’m coaching. And the people I coach are searching for ways to increase their passive income and make money while they sleep. They want to leave the dreaded “rat race.” A noble pursuit, if you ask me.
So, without further ado, let’s dive into the 5 biggest financial mistakes that millennials make (and what to do about it).
Please keep in mind, these are in no order of importance or prominence. I have noticed at LEAST one or more in almost every single one of my coaching clients.
1. Believing that there is only 1 correct path to make a living
Many of the millennials I talk to believe that there is only one correct way to make a living. And, funny enough, it almost always follows the traditional perspective of, “find a good job, save money for retirement.”
This is entirely untrue, end even more so if you consider the power we have given the technology we wield. In fact, I read a very funny post the other day that really put the power and convenience of modern knowledge into perspective. The post read like this…
“If somebody from the 1950s came to today, what would they think is the most mind-blowing part of everyday life?”
The answers were astonishing. Specifically, this one…
“Our cell-phones, and what we do with them. Any person from the 1950s would be astonished that we have a complete and organized database of all the knowledge publicly available to mankind and that we use them to get into fights with strangers and watch videos of cats.”
Put this into perspective. We have the entire history and knowledge of mankind in our pocket, and we still believe that there must be only one perspective to consider when it comes to our livelihood.
The main point I want you to pull from this first item on the list is this: NEVER believe that you must copy the actions of somebody else to be successful. You DON’T have to take the beaten path.
Most millennials fall victim to this perspective because it is what they grew up with, what they are used to, or simply what they are most comfortable with. You’ll find in many ways throughout life that comfort is, quite literally, the direct enemy of growth and progress.
All in all, when it comes to becoming financially secure, don’t limit your options with outdated beliefs, the presence of the technology we have should have blown a hole through those beliefs long ago.
To those who are happy working a 9-5, or being an entrepreneur, or saving for retirement traditionally, that’s all that really matters. I simply want you to recognize your options.
This brings us to our next point, which has to do with happiness in relation to money. The next fatal financial mistake is…
2. Failing to recognize the true role of money in our lives
What is the true purpose of money? Honestly, what is the boiled-down, concentrated, inarguable purpose of money in our lives? The answer is, “it depends on who you ask.”
For example, the economist would say that the purpose of money is to provide for your fellow man.
The philosopher would say that the purpose of money is to quantify the value of life and public order.
But we, as individuals, most often say that the purpose of money is to provide some degree of personal comfort to our lives through what it can directly buy us. This is a horrible perspective. Let me explain.
The more I work with clients, the more I recognize that there are self-limiting beliefs regarding money and one’s ability to obtain it. For example, how easy is it for you to ask for a raise?
If you are like most people, it’s probably not that easy to ask for a raise, and for a multitude of reasons which almost always boil down to, “we don’t believe we are truly worth it.” That’s the perspective I have seen most often. It is entirely self-debilitating.
Rather than view money as a means of gathering “comfort stuff,” let’s start viewing money as a means of freeing up our time instead. Why? Because what is the single most objectively inarguable fact in the financial world?
Austin’s Fun Financial Fact: Time is ALWAYS worth more than money.
And when I say always, I mean ALWAYS.
The difference then becomes your own perspective as to how much you believe your time is worth, and what you will settle for. That is why there are people who make $10 an hour, and people who make $1000 an hour. If time were actually financially tied to money in an objective way, there would be consistency among wages.
Here’s why this point is important, NEVER DO ANYTHING FOR THE MONEY.
Sounds easy and simple, I know, but it opens up the mental doors you have to discover money in a more radical and truthful way. Money is worth nothing in comparison with your time. DO NOT waste your precious time by sacrificing your happiness for money.
I wrote this in my book, The Potential Dichotomy, “Money doesn’t buy happiness, but happiness DOES buy money.” Let’s break down this logic and make it easier to understand.
No amount of money can buy back your time. But, if you were to choose to do something you loved for a living, you’d probably also find the motivation to continue it through your sheer personal interest and investment into your craft.
Then, because you are so invested in that skill, you have likely become an expert at it simply through your constant and unending improvement to that craft. And guess what, experts are paid…A LOT.
You have then become quite wealthy for simply doing something you believe is fulfilling and enjoyable – something you would have done despite the money involved in the first place.
Here is my point, money is a means to an end. If you are not forced to become a martyr for the sake of money, then don’t. You will NEVER regret quitting a job that you hate to pursue your dreams, I guarantee it.
3. Failing to recognize the importance of compound interest
Ahhhh, compound interest. Compound interest is the single most important tangible characteristic of the wealthy (maybe besides the intangible benefit of a money mindset).
Compound interest is everywhere that anyone talks about money management, it is the be-all-end-all of growing your wealth over time.
You may have heard compound interest described in the following phrases before…
“Making your money work for you.”
“How the rich get richer.”
“Curved growth as opposed to linear growth.”
There is no shortage of ways that people can convey what compound interest is, but I’ll do it anyway in case you don’t already know.
Compound interest is the addition of interest over an initial sum or deposit. Over time, even the interest that was previously added grows interest upon itself. This is why wealth can grow at an exponential rate because the percentage of interest that grows each year becomes a larger and larger amount upon the initial sum of money.
Maybe that sounds difficult, and It can be difficult to visualize. What you really need to know is this: Compound interest means you can grow your wealth without sacrificing more time or having to save more money. That’s it. That’s the sole benefit of compound interest.
To be honest, the same goes for passive income, but you would have to actively save that money. Compound interest grows your wealth on its own.
Let me give you a diagram.
Notice how the coins double each and every time and present a curved growth factor. I’m sure you’ve heard of the famous “double a penny every day for a month” example, right? That is the difference between exponential and linear growth.
For example, linear growth is like working an hourly wage. Let’s say I work a day’s work and get a dollar each day. After 30 days, I would have just $30, right?
Now let’s compound that $1 a day by a %100 rate of return daily (for the sake of example).
After a single day, I’da have $1, whoopy.
After 2 days I’d have $2, the same as the linear progression, right? But watch what happens after day 3 and beyond.
Day 3: $4, NOT $3
Day 10: $512
Day 20: $524,288
Day 30: $536,870,912, as opposed to $30
Now we can see the difference compounding makes. I’d rather compound interest and make money by doing nothing as opposed to working my whole life for less.
This is why the rich get richer. They make so much money in interest that they can live off of the interest they accrue alone, never having to touch the principle balance.
You can make compound interest in so many different ways. Here are just a few that I teach to others.
Compound Interest Techniques:
– Stock Market
– (High-Return Investments of any kind)
– High-Return Banks
Remember, saving money IS LOSING MONEY. If your money is not gathering interest at a rate of AT LEAST 2% annually, your money is losing value due to inflation.
This is why investing money is not only crucial to your wealth, but also to the integrity of your money’s value.
4. Failing to recognize passive v.s. active income
Now, passive income and compound interest are closely related. This is because compound interest IS a form of passive income, but not every form of passive income is gaining your compound interest. It’s one of those “all squares are rectangles, but not all rectangles are squares” things.
Passive income is money that you are being made continuously for a ONE-TIME investment of some sort. For example, writing a book is a one-time investment for a commodity that can be sold over your entire lifetime.
With passive income, you don’t trade your time for money nearly as much as you do when you work for an hourly wage.
The difference? Passive income is “scaleable.” It simply means that you can take a small investment or action and generate a larger return.
Passive income is often described as “money that you make while you sleep.” And it’s true. It is income that you do not need to actively work for to benefit from.
Passive income is how book royalties, movie royalties, music royalties, and tons of other “royalties” work. Essentially, write a hit song, and guess what, people will continue to buy that song over the course of your lifespan, and you will continue to make money.
In the book, “Rich Dad, Poor Dad” Robert Kiyosaki mentions that there is a single important characteristic that must be in place for you to “leave the rate race.” That characteristic is this…
Your PASSIVE INCOME must EXCEED your EXPENSES.
In other words, the money you make each month by NOT WORKING needs to exceed your monthly expenses before you can dream of leaving work (or an hourly wage) behind.
This is important, because Robert Kiyosaki also says, “If you don’t find a way to make money while you sleep, you will work until you die.” Unfortunately, he is right.
Most millennials recognize that it is possible to make money passively, they often simply don’t know how.
As someone who has ridden the passive income train through multiple sources and streams, let me describe some of the ways I’ve personally made passive income that you may want to consider.
Passive Income Methods:
– Investments (compound interest)
– Book Royalties
– Music Royalties (I’m a guitarist)
– Retirement accounts
– Recorded Courses
There are many more ways to make passive income. For example, affiliate marketing (not recommended, i.e. pyramid scheme), drop shipping, e-commerce, these are just a few of the ways people have made passive income.
The only reason I don’t recommend MLM or Affiliate marketing is because of the ethics involved. These types of businesses tend to pray on the subsequently declining profit margins per tier of their pyramid scheme.
This means that the people at the top of the pyramid will make the majority of money from the sales and hard work of those unfortunate or desperate enough to be recruited by them. I can’t back the business ethics here.
Overall, The best way to move forward is to find ways to make passive income and then funnel that income into a compound interest system. That way, you not only make money while you sleep, but your MONEY makes MONEY while you sleep as well!
5. Misunderstanding risk and reward relationships
The last most common mistake I see millennials make is simply misunderstanding the nature of risk and reward to be nigh-inseparable. Remember when I said that comfort will reduce your progress? In this case, the risk and reward are often inverse relationships with each other.
A person should only take risky action if they believe the reward of that action is worth the possibility of failure. This is why comfort is dangerous, By being comfortable, you are often settling for where you are in the moment.
Think of it this way, are you happy if your life never changed from this moment onwards? Most people are not.
So, what are you going to do about it? You have a choice every minute of every day to either 1) accept that things the way they are, or 2) change your own circumstances.
I WILL NOT allow anyone to make excuses for themselves. We all have the power to react to our own environments and build the life we want from scratch. This includes our financial positions as well.
Let me ask, why have we constantly seen people come from extremely difficult and debilitating backgrounds to make a great name for themselves? Grant Cardone, a drug and alcohol addict became a multi-million dollar real-estate mogul who makes 9 figures.
Eminem, a troubled, beaten and bullied kid from a horrible lifestyle became one of the most respected and successful people in the music industry. I guarantee you none of these people were simply given all these things.
They recognized their position and could no longer justify their failures. As a change management consultant myself, I fully recognize that there is a point at which the present situation becomes so uncomfortable that you must change and adapt.
The question is, are you adapting to become comfortable with only that which will satisfy you, or are you adapting to gain everything you’ve always dreamed of?
To do that, you need to start taking risks and measuring rewards. Studies have shown that the most common regrets of elders are centered around 1) The things that they DIDN’T do as opposed to the things they did do, and 2) The risks they DIDN’T take but always wanted to.
This simply goes to show that you are much less likely to regret taking a chance on happiness than you are to regret staying comfortable with less than you are worth.
Ask for that raise. Take that trip across the globe. Quit the job that makes you miserable. Think less about the money and more about the time and happiness you will receive. I can guarantee you, that at the end of your life, you won’t regret it.
After all, the largest financial mistake that millennials make is believing that money is most important. It’s not.
Overall, et me summarize the 5 biggest financial mistakes that millennials make so that you won’t forget.
1. Believing there is only 1 correct path to make money. Blow that outdated belief aside.
2. Failing to recognize the role of money in our lives. Money is always less valuable than our time. No matter how much.
3. Failing to recognize the power of compound interest. Make your money work for you, so that you don’t have to work for it.
4. Failing to recognize passive v.s. active income. Be a creator, not a consumer.
5. Being afraid of risk. Great risk means great reward. Don’t be afraid to take risks if it means you are pursuing happiness, and not money.
Thanks for reading!
Work With Austin
-Austin Denison is a management consultant and coach from Southern California and founder/CEO of Denison Success Systems LLC. He is the author of The Essential Change Management Guidebook: Master The Art of Organizational Change as well as The Potential Dichotomy: The Philosophy of a Fulfilling Life.