For Millennials, figuring out how and where to save money and invest it is a little trickier than for previous generations.
In many ways this group has the same financial concerns of previous generations. They might be paying off student debt, saving for a house, putting money into retirement accounts, building an emergency fund and even saving for their kids’ schooling. While similar, though, the Millennials’ situation isn’t exactly the same as it was for previous generations.
What ages are Millennials and Generation Y?
Millennials, also known as Generation Y, were born somewhere between 1980 and 2000, the specific years depending on who’s defining it. Right behind them is Generation Z, born after 2000. This group includes anyone from a baby to a high-schooler. Some may be thinking of their future, but they’re probably aren’t doing much to plan for it. But they’ll face the same financial constraints of Generation Y.
How is financial planning different for Millennials?
Combine pension uncertainties with Millennials moving more than previous generations, as well as the prospect of their becoming entrepreneurs or freelancers rather than paid employees, and it makes sense that the retirement burden will fall on them. This, of course, adds more financial pressure than previous generations experienced.
Financial advice for Millennials
- Have a cash emergency fund with three to six months of living expenses. That helps with any unforeseen expenses, such as car or home issues not covered by insurance or job loss. This way an emergency doesn’t cause the person to tap into his or her retirement account, which can trigger adverse tax consequences, or to acquire high interest credit card debt. Once the emergency fund is established, it’s time to tackle other financial issues.
- Pay down debt. Start with consumer credit cards, as the interest rates on these are usually the highest, often around 18% to 20% ,. Managing student debt is a big concern for this generation. According to the National Financial Capability Study, about 40% of Millennials have student debt and more than a third have car loans. About 30% have more than one type of long-term debt, which might also include a mortgage. That makes debt management a big priority.
- Start a retirement account. Starting one in your early 20s makes it much easier to reach a retirement goal than in your 40s. Take advantage of an employer’s 401(k) match, if available. That’s free money. With additional money to invest, open a Roth IRA where the money grows tax free.
Think about this: Compound interest works even better for teenagers than for mid-20s Millennials. A $2,000 savings in a Roth IRA, at 7%, will add up to more than $65,000 by the time you’re in your 60s. Wait for 10 years to invest the $2000 and you’ll wind up with about $33,000. Get more facts on Millennials and saving for retirement with this infographic.
While for Generation Z these suggestions might seem to deal with remote issues, high school is a good time to start thinking about finances. Attitudes about money and savings are formed early.
Raise your financial consciousness
Spend an hour a week on your finances, understanding what you owe on loans and living expenses and exactly what money is coming in and going out. If there’s continually not enough money at the end of the month, consider taking a part-time job or adding freelance work into the mix.
Another option: Lower your spending. During that weekly financial time, review your retirement plans and make sure you have the proper insurance in place, such as renter’s insurance.
Though conventional wisdom says to buy a house, that’s not the right decision for everyone. Buying a house doesn’t make sense in all situations, given the high divorce rate and Millennials moving frequently. Either contingency can make a home purchase problematic and can cause financial losses, especially if the home needs to be sold within the first few years.
When your finances are under control, take a look at your life goals, whether that means taking a big vacation to Europe, saving for an engagement ring or buying a house. Having a clear sense of priorities helps define goals and on how to get going on the path to those goals. Find a financial advisor you trust who can help get you started on the path to financial security.