With two millennial children, I see firsthand the unique personalities built into this new generation. Even though they have been dubbed the Me Generation or labeled as entitled or self-obsessed, there is another side to their coin. Millennials are also open-minded, passionate and self-expressive. But what does all this mean when looking at finances. Do Millennials act differently with money, are they less financially secure or have they just not had the chance to show their financial worth yet?
Each generation in America has their own unique struggles and challenges. Baby Boomers came of age post World War II with parents that either survived the depression, the war or both. This forever melded their financial outlook on life. Generation X’ers are the sandwich generation balancing the world of entitlement for their Millennial children and 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 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 moving back home with parents. How do they best approach and conquer this challenge in their lives? 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 tempting to feel the excitement of spending all your paycheck, and 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 need. You have an entire lifetime to build 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 build up some savings than to start a life time 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. Layout 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. Build this payment plan into your monthly budget. Commit to having your debt paid off in a reasonable time, allowing yourself the satisfaction of accomplishing your task and having a little balance.
- Avoid new debt- A new job means newfound freedom. Credit will be more available than it has ever been before. Having access to this new flexibility is very tempting whether it be 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. Build up your savings first before buying the big temptations.
- Establish good credit- Now is the time to build your personal credit profile. Make 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, it also may help you get an apartment, buy insurance and even land a job.
- Start your retirement saving- The easiest way to start your retirement savings is by enrolling in your company’s 401k plan. Take advantage of the structure set up by your company and the possibility of company matches. If you don’t have access to an employer plan, set aside enough money to contribute to an Individual Retirement Account 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 savings automatic by scheduling regular transfers from your checking account as soon as you are paid. With automated savings, you can put your savings in the back of your mind, causing you to manage your monthly cash flow without it. Over time, you will be amazed 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 of unexpected events. Build an emergency fund of three to six months’ of your current cash flow. This fund can help cover you in the event the unexpected 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 that new money into your savings before you increase your spending. At a minimum, split the difference- if you get a four percent raise, allocate two percent towards savings and give yourself the other two percent to enjoy in spending.
- Create a plan- As you move into your 30’s your financial life becomes more complex. You may be saving for your first house, starting a family or looking at a future with new goals and dreams. In order to reach your goals, you should create your first financial plan. Focus on your short-term and long-term goals. Think about priorities and the direction you want to go. Build a financial plan that creates savings goals 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 the conversation 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 children about money. Open the door to the subject early to remove the taboo. Start by using simple examples and lessons around money: 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 each year, even it if is 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 builds over time and will make a difference as you build your financial future.
- Diversify- As your savings grows over time, your investments become more and more significant. Be prudent about your investments, don’t look for the next big thing or be too greedy about returns. Make sure you are investing 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 to 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 consider the need for life insurance. Look at a term policy to cover the period of time you are at risk. Determine the amount of coverage needed to support your family in the event of your absence. Avoid products that combine insurance and investments- these are two different needs that should be handled separately. Get the term insurance you need for the time period at risk and allow your investments to grow on their own and independent.
As I launch my children into this brave new world, I hope they take a step back and learn the basic behaviors necessary to build their financial future. For anyone, striving for long-term financial security 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 always holds true- spend less, save more and you will be on your way!