While confidence usually is a good thing, sometimes it can be dangerous — especially when it comes to finances.
The youngest generation in the workforce may be about to learn that the hard way.
New number show Millennials consider themselves far more money savvy when it comes to money than they actually grade out. While nearly seven out of ten Millennials gave themselves high marks when it came to financial know-how, only a quarter showed even basic money management knowledge, according to a new study by the National Endowment for Financial Education and George Washington University.
"As a Millennial myself, I am surrounded by my fellow counterparts - and the financial advisor in me wants to scream," said Kay Pfleghardt, a registered financial associate with Family Wealth & Legacy LLC.She said Millennials often underestimated things such as the burden of student debt and the importance of an emergency fund.
"If the Millennial is successful in building up a solid emergency savings bucket, they will feel a huge sense of accomplishment," she said. "This is especially true for Millennials, as the vast majority of other millennials around them have failed to do this one simple thing."
Pfleghardt said the simplest way to do this is to have one's checks direct deposited into their checking account. Then have their bank set up an automatic transfer to a savings account on the same day that you receive your paycheck.
"The conscious effort of transferring money into an emergency savings fund makes it more unlikely that the individual will be willing to withdraw from the account, or that they will procrastinate about making that deposit into their savings account," she adds.
Robert Johnson, president and CEO of The American College of Financial Services, said one of the biggest mistakes Millennials make is saving for retirement instead of investing for retirement.
"The greatest asset one can have in accumulating wealth over the long term is time," he said.
A recent UBS study showed that Millennials had an asset allocation that was similar to that of the World War II generation — with large percentages in cash and little in equities.
"In other words, they are unwilling to embrace risk even though they have a long time horizon and have the ability to bear risk," Johnson said. "Risk tolerance is composed of two elements — ability to bear risk and willingness to bear risk. Millennials have the ability to bear risk — they have a long term time horizon and over the very long term equities provide a higher return than bonds or certainly cash."
Johnson points out Millennials, like those in the World War II generation, had their financial lives shaped by a cataclysmic financial event — the Great Depression in the case of those from World War II generation and the Financial Crisis of 2007-08 for Millennials.
"If Millennials remain unwilling to embrace risky assets, they will find that they will have to set aside a much higher portion of their income for retirement or to work much longer than they planned to," he added. "The higher the annual return, the greater the power of compounding. Since 1926 … the average annual return for large capitalization common stocks is 10%, government and corporate bonds return around 6%, while cash is in the neighborhood of 3%."
Flynn Zaiger, a Millennial founder of a digital marketing agency located in New Orleans, said sometimes his generation's ambition gets the best of them, and their lack of money knowledge could can be a detriment — particularly when social security is more a dream than a promise for this generation. But he does believe his generation can be reached.
"Connecting their current situation with their future is the best way to increase desire for greater money-management knowledge in Millennials," he said.
"Talks of IRAs, 401(k) (plans), APRs and acronyms will put them to sleep faster than a two hour PowerPoint," Zaiger said. "Instead, connect the ideas of savings with their futures. Do they want to retire at 60, and travel the world? Letting them know that's impossible with their current knowledge and savings, is a great way to get them to change their ways."