Millennials and Money
Let’s talk about Millennials. Everyone tries to tell Millennials what they should be doing with their money. Save! Save! Save! - that’s pretty much the bottom line of all the articles out there about how you should become financially successful. Budget, save for retirement, know what you’re spending your money on, think about investing, be sure to start paying those student loans and oh, did I mention budget? This so called “ beginner's guide to money” can quickly start to seem really overwhelming, unachievable and scary. Let’s lay down a few thoughts and philosophies about money that are sane, sound and simple.
Don’t let the big numbers scare you. Yes, you will need to save for retirement and it's no secret that the sooner you get started the better. However, there is a lot of life to live between now and then so it is important to address your financial decisions in the proper order.
First, your ability to earn income is your greatest asset at this point. Make sure you protect it accordingly. This includes disability and life insurance. Insure yourself to your full economic value and secure this protection early. Insurability can be more challenging as you get older, so do it while you're young.
Second, having access to money when you need it is critical to long term success. If you don’t have liquidity, then you will likely go into debt or stop the long term savings contributions you are making in order to get the money you need now. This is a common problem that can easily be avoided. Strive to save 15% of your gross annual income and accumulate 6 months worth of living expenses in an easily accessible account.
Now you can start saving for retirement. Here’s something you’re not going to hear from many so called “financial experts” who are writing blogs. Be careful when contributing more than the match into qualified plans. Remember, qualified accounts are controlled and regulated by the government. This means the rules can change at any time. In addition, the tax treatment of those accounts are based on your tax rate in retirement. Now, I know you have heard that you are likely to be in a lower tax rate when you retire, but is that really the case? With inflation, you may have to withdraw more money to get the spending power you have today. Since we don’t know what tax rates will be in the future, why not diversify those retirement dollars so you can deal with a known tax rate today.
Finally, millennials have one big thing they’re all pretty worried about. And to be fair, it’s a big thing. Student Loan Debt. Americans owe over $1.4 trillion in student loan debt. And the Average monthly student loan payment (for borrower aged 20 to 30 years) is $351. While the average starting salary is projected as $50,556, the unemployment rate is currently 5.6%, which is up from 2007. No one wants to have a large amount of debt hanging over their head, but if you focus only on paying that debt down first, you could be jeopardizing your future. Why not try taking the amount you can save each month and allocate ¼ into protection, ¼ into savings, ¼ into retirement and ¼ to pay down debt. The result is a smart, balanced approach.
To sum things up, the best thing to do is to get started and don’t be afraid to start working with a financial adviser. They can make the process sane, sound, and simple.