With two children who happen to be millennials, I see firsthand the unique personalities built into this new generation. Even though they have been dubbed the “Me Generation” and labeled as entitled or self-obsessed, there is a flip side to their coin. Millennials are also described as open-minded, passionate and self-expressive. But what does all this mean in a financial context? Do millennials act differently with money? Are they less financially secure? Or, have they just not yet had the chance to show their financial worth?
Each generation in America has their own unique struggles and challenges. Baby boomers came of age after World War II with parents that survived the Great Depression, the war or both. This forever molded their financial outlook on life. Gen Xers are the sandwich generation, balancing the world of entitlement their millennial children were born into while taking on the care of their baby boomer parents as they slide into their golden years. Millennials will have their own battles to fight and dragons to slay. They will likely face a world of excessive college debt and difficulty finding jobs in their chosen fields. Others will either incur high housing costs or deal with the prospect of moving back home with their parents. So, how do they best approach and conquer these life challenges? Here are some tips millennials should consider when planning out their financial future.
Economize: Once you get your first real job and go out on your own, it is easy to get caught up in the excitement of spending, perhaps your entire paycheck (or more). Take a deep breath, step back and be thoughtful when it comes to spending. Don’t overspend on a bigger apartment or fancier car than you actually need. You have an entire lifetime to build up your finances, allowing you to buy the things you may want. When you are starting out, learn the value of a dollar. It’s more important to pay off debts and create some savings than to start a lifetime habit of overspending and incurring debt.
Pay down debt: As a new college graduate, you may have student loans or even credit card debt. Set up a plan to pay off your debt over time. Lay out your various debt obligations, your monthly payments and the interest rates on each. Build a plan to focus on the highest-interest-rate debt first. Integrate this payment plan into your monthly budget. Commit to having your debt paid off in a reasonable time, giving yourself the satisfaction of accomplishing your task and having a small balance in the process.
Avoid new debt: A new job means newfound freedom. Credit will be more available than it ever has been before. Access to this new flexibility is very tempting, whether it may involve buying a new house or a better car. Be careful. Think hard about new purchases. How do they work into your annual budget, your debt plan and your savings goals? Try to avoid new debt that is not necessary. Shore up your savings first before succumbing to temptation and buying that big-ticket item.
Establish good credit: Now is the time to solidify and strengthen your personal credit profile. Make it a habit to pay all outstanding debt on time, every time. A good credit record will make it easier for you to qualify for home and auto loans in the future. Good credit goes beyond future purchase flexibility, because it also may help you get an apartment, buy insurance and even land a job.
Start saving for retirement: The easiest way to start your retirement savings nest egg is by enrolling in your company’s 401(k) plan. Take advantage of the structure set up by your employer and the possibility of company matches. If you don’t have access to an employer-sponsored retirement plan, set aside enough money to contribute to an Individual Retirement Account (IRA) each year. This can build your savings and reduce your taxes at the same time.
Automate other savings: Set up a savings account that you can use for special purchases or short-term goals. Make saving automatic by scheduling regular transfers from your checking account as soon as you are paid. With automated savings, you can push those funds to the back of your mind, permitting you to manage your monthly cash flow without it. Over time, you will be amazed at how much your savings account has grown without a lot of maintenance or attention on your part.
Prepare for emergencies: Now that you are officially on your own, you need to prepare for the unknown. Anything can happen to your job, your health or your family. An emergency fund can help manage the stress (and risk) of unexpected events. Start building an emergency fund with an amount equal to three to six months of your current cash flow. This fund can help cover you in the event a disaster occurs and will give you time to get back on your feet.
Manage your raise: When you get a raise, don’t automatically increase your spending. Be thoughtful about the additional money coming in and how it could help you the most. Look to see if you can put some or all of that new money into savings before you increase spending. At a minimum, split the difference: If you get a 4 percent raise, allocate 2 percent toward savings and give yourself the other 2 percent to enjoy in spending.
Create a plan: As you move into your 30s, your financial life often becomes more complex. You may be saving for your first house, starting a family or looking at a future with new goals and dreams. To reach your goals, you should create your first financial plan. Focus on your short-term and long-term goals. How are these goals connected to your values? Think about priorities and the direction you want to go. Develop a financial plan with concrete intermediate steps that can turn your dreams into reality.
Talk about money: As you get married or begin to build a life with a partner, conversations around money become very important. Start talking with your partner about money and what it means to each of you. Understand your individual trigger points when it comes to finances and be prepared to compromise on money matters. Take the time to have these conversations before tensions occur.
Teach your children: As children enter your world, every parent should consider the best way to educate their offspring about money and healthy financial habits. Open the door to the subject early to remove the taboo. Start by using simple examples and lessons around money, such as how to understand the value of a dollar, how to become responsible about money decisions and the importance of saving for the future.
Increase your savings: Build discipline into your savings plan early. Every year, make a point to increase your savings, even if it is only by a small amount. Contribute more to your retirement accounts, put aside money for short-term goals and increase your emergency fund as your lifestyle changes. Every little increase compounds over time and will make a difference as you build your financial future.
Diversify: As your savings grow over time, your investments become more and more significant. Be prudent about managing them; don’t look for the next “hot” thing or be too greedy about returns (after all, it’s your goals that matter, not someone else’s). Take care to invest in a diversified way. Balance your allocation to stocks and bonds. Make sure you have spread your risk among large and small companies, domestic and international, too. Putting all your money in what you hope will be the next home run can leave you with a big loss.
Get life insurance: As your family grows, it is time to start looking at how an unexpected event may impact your spouse or children. If others are relying on you and your income, it is time to think about the need for life insurance. Consider a term policy to cover the period of time you are at risk. Determine the amount of coverage required to support your family in the event of your absence. Avoid products that combine insurance and investments – these meet two different needs that should be handled separately. Get the term life insurance you need to appropriately address your risk and allow your investments to grow on their own and independently.
As I launch my own children into the world, I hope they step back and recall these basic behaviors necessary to secure their financial futures. For anyone, striving for long-term financial freedom can be overwhelming. For a young person just starting out, it can cause fear and paralysis. Start simple and be thoughtful. You can build great habits today that will benefit you for a lifetime. When in doubt, the old adage almost always holds true: spend less, save more and you will be on your way!
Learn more about Stuart by visiting her website www.stuartvicksmith.com