By Toby Mathis
COVID-19 wrecked a humming U.S. economy and put many retirement plans in jeopardy. With the manufacturing of vaccines, however, hope of a recovery is slowly being restored.
Meanwhile, the reality is that the least wealthy have been hit the hardest during the pandemic, and millennials have taken an unfair share of the damage. Overall, the rich keep getting richer and the gap between the wealthy and poor continues to grow even wider.
With a potential recovery, will a period of economic expansion transpire, similar to the one that followed the Great Recession of 2008-09? It’s hard to say, but millennials, the largest demographic of the U.S. workforce, are not in the best position to capitalize on any financial boom. And that scenario is eerily similar to their plight during the economy’s 10-year recovery prior to the COVID-related crash.
Many members of the millennial generation did not experience economic gains back then. While the economy grew and the stock market kept climbing, millennials were hamstrung by student debt, tapped their retirement savings, and relied on high-interest loans. Researchers who focus on financial literacy now are warning that another lost decade could be in store for many millennials for basically the same reasons – habits centered around low financial knowledge and poor money management practices.
But there are ways for young people entering their higher-earning years to break these bad habits and get their financial act together, which will put them on a path toward solid retirement planning. It really isn’t complicated, requiring primarily knowledge and the discipline to make smart choices. These are the three major financial no-nos that many millennials commit that keep them financially imprisoned, and how to avoid them:
Never pay an expense with a liability. An easy example to understand is don’t use credit cards to pay your rent. Some of you might say, “I have no choice.” But you do have a choice. Cut the expenses. Move back in with relatives or share space with others. Work hard to not incur liabilities to pay for your expenses. Just say no.
Further, it makes no sense to incur substantial college debt for a degree in fields that have low average salaries, such as English, history or philosophy. The one exception to not paying expenses with a liability is if you’re a student going after an engineering, professional or other degree that has a high market value you can verify. But if you’re a working-age adult working full-time, absolutely do not pay an expense with a liability, because you’ll dig your hole much deeper, and retirement may well be a pipe dream.
Don’t buy liabilities with your income. Resist the temptation to buy something just because you financially qualify. First-time home buyers are often surprised that they qualify to buy a big house, but that doesn’t mean they can afford it. This is often the start down the road to pain.
Your real estate agent would love to sell you a more expensive home because they make more on the commission. Lenders would love to max you out to make money off of you on the loan. Credit card companies love it when you buy things on your card and carry a large balance. The furniture store salesman would love to sell you new furniture for each room of your house and will likely have in-house credit to offer as well.
Rather than buy liabilities with your income, buy assets with your income. When you have enough assets, you can start in with larger purchases, but not before. It’s like a game of Monopoly. Your first several times around the board, you buy assets that will produce income later. But don’t spend lavishly now just because you want stuff.
Don’t buy liabilities with a liability. Let’s look at something many people do – buy a car with credit. Don’t. You need to have an asset that’s paying for that car.
Let’s say I have a rental house that’s generating $500 a month positive cash flow, and I get a car loan that is $500 a month. That’s fine, because I’m not incurring extra expense. I’m paying for it with earnings from an asset. The same is true of boats, RVs, or anything else that is a want and not a need. It’s even true for your home. To add clarity, there is a base reasonable expense for just about any need. For example, if you need transportation, you don’t need a Bentley. Most everything else you buy is a want. But whatever you do, do not buy the want on credit or by taking out a loan.
If you know, for example, that you can rent a reasonable home in a reasonable neighborhood for $1,500 per month, then that should also serve as your budget for buying a home. And remember, that figure does not represent only your mortgage, but also your insurance, interest, maintenance, and all the other added expenses of a home. What you should do is rent the reasonable home in the reasonable neighborhood and build up assets with any extra money you can save. As those assets increase, your ability to buy liabilities with the cash flow from those assets increases.
These no-nos are to be avoided like the plague, yet so many fall prey to them, and it’s not just millennials. I call it a losing loop, and it’s progressed to the point of a national crisis. People fall for the low interest rates and great deals and end up in the loop of buying a liability (i.e. a car) with another liability (i.e. loan). So many people in our national workforce who are in their prime earning years feel financially imprisoned, and retirement seems impossible.
But it is possible, because these problems that bring pain and suffering are easy to avoid with the right knowledge and with disciplined decision-making that impacts the short term and long term.
About the author: Toby Mathis
Toby Mathis, author of the upcoming book Infinity Investing: How the Rich Get Richer And How You Can Do The Same, is a founding partner of Anderson Law Group and current manager of Anderson’s Las Vegas office. He has helped Anderson grow its practice from one of business and estate planning to a thriving tax practice and national registered agent service with more than 18,000 clients. In his work as an attorney, Mathis has focused exclusively in areas of small business, taxation, and trusts. Mathis has authored more than 100 articles on small business topics and has written several books on good business practices, including Tax-Wise Business Ownership and 12 Steps to Running a Successful Business.