Yahoo Finance 4 Ways Trying To Appear Rich Stops Millennials From Getting Rich
It’s human nature to want to fit in, but trying to gain other’s approval stands in the way of reaching your financial goals. If you’re trying to appear rich, that can easily prevent you from actually building wealth. Yet too often, millennials fall into this trap.
A Wells Fargo study of high-income Americans found that nearly 60% of millennials think it’s “important to ‘look or appear’ financially successful to others,” yet only 35% of Gen X, 14% of boomers, and 7% of Silent Generation respondents felt the same.
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While flashing wealth may be your prerogative if you have the means to do so, it could be getting in the way of more important goals. Considering that nearly one-third of affluent millennials buy things they can’t afford to keep up with appearances, as the study found, it’s easy to earn a high income yet still overspend.
“Looking rich and building wealth are diametrically opposed,” said Susan Einberger, a CFP and enrolled agent at Enjoy the Ride: Financial + Life Planning. “It is a self-defeating and never-ending psychological game because there is always going to be someone who has more or better things.”
By trying to appear rich, you could hurt your actual finances in the following ways:
Focusing On the Short Term
If you’re trying to appear rich, then you might be focused on buying cars and clothes to show off.
“Pursuing the shiny objects of today can so easily blind anyone from even beginning to think about their future,” said Steve Martin, a CFP and CPA at Oasis Wealth Planning Advisors, LLC.
That limits your ability to focus on long-term goals and actions, like investing in stocks to build wealth over decades. And while it might be tempting to look for a hot investment that brings short-term gains, that type of approach tends to be riskier than patient, long-term investing.
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An analysis by Schroders Wealth Management going back nearly 150 years found that if you invested in the S&P 500 for just one month at a time, you would have lost money approximately 40% of the time. Yet if you invested for a five-year period, you would have only lost money around 20% of the time. And there has only been one out of 1,551 rolling 20-year periods between 1871-2020 that resulted in an inflation-adjusted loss.
Restricting Cash Flow
Trying to look rich also keeps you from getting rich by spending your cash on showy objects or fancy experiences that ultimately cut into your larger financial goals that can increase your net worth.
By buying things you can’t afford, “from a cash flow perspective, this can impede a Millennial’s ability to achieve milestones, such as buying a condo or paying off student debt,” said Emily Irwin, senior director of advice at Wells Fargo Bank.
Worse, you could end up going into debt trying to keep up with the Joneses, affecting your future spending abilities. The Wells Fargo study found that 40% of affluent millennials have taken on more debt than they wanted so that they could live larger, while only 29% of Gen X, 6% of Boomers, and 4% in the Silent Generation said the same.
“Some people can get caught up in social comparison — be it a need to impress parents, friends, relatives, kids, colleagues — and one way for them to express ‘success’ is by overspending,” said Irwin. “Unfortunately, this behavior can perpetually feed on itself, so this charade is hard to keep up — both emotionally and financially.”
Hurting Credit Scores
Some people might think debt isn’t a big deal and that it’s more important to spend money while they can.
In addition to peer pressure from social media, which doesn’t always represent reality, “Millennials may also have a less rosy picture of the future in terms of how solid financial moves can help you because they have seen a couple of market crashes during their early years,” said Martin. “I wonder if they fully trust the key financial underpinnings of what long-term financial success is made of. They may think ‘carpe diem’ because tomorrow’s financial success may never come.”
However, even if you don’t trust the system, one clear downside to using debt to fund what looks like a rich lifestyle is that it affects your immediate expenses, as well as your ability to qualify for important loans, like a car or house.
“If Millennials are taking on additional debt that they can’t regularly pay off to fund their lifestyle, this can also affect millennials’ credit scores, which can cost them money in the short-term since good credit scores often translate into dollars saved, while poor credit scores can mean that you’re paying more,” said Irwin.
Ignoring Retirement
Lastly, trying to look rich keeps millennials from saving and investing for retirement. While you might think retirement doesn’t have much to do with wealth, it’s important to consider what you’re trying to accomplish in life. Many people want to be able to enjoy their golden years without the stress of carrying debt and trying to make monthly ends meet. So a retirement nest egg helps you avoid that problem.
“Building true wealth provides financial independence, the ultimate goal. At this point work becomes optional because one can live off the earnings of their investment portfolio,” said Einberger.
To build this wealth, it’s important to put money away for retirement early, rather than letting the pursuit of looking rich keep you from investing.
“If you’re a Millennial, then retirement is probably decades away. That can cause an out-of-sight, out-of-mind mentality, and yet this is the best time to set aside dollars for ‘future you,'” said Irwin.
You could also be giving up free money if you’re not taking advantage of an employer retirement match, said Irwin. And you should make sure to understand “the concept of compounding, which can make a huge difference over the years.”
What Millennials Should Be Doing
Ultimately, rather than trying to look rich, which can be hard to perpetuate, consider focusing on the fundamentals, like saving for retirement, as well as building 3-6 months’ worth of emergency savings, said Irwin.
Doing so can help you feel more secure, and you can set yourself to become rich, rather than having to deal with the stress of putting on a front.
“Building wealth happens when one lives within their means, diligently saves, makes smart investing and tax decisions, and stays the course over the long-term,” said Einberger.
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This article originally appeared on GOBankingRates.com: 4 Ways Trying To Appear Rich Stops Millennials From Getting Rich
