7 Steps for Millennials to Gain Control Over Their Financial Future By Erik Carter, JD, CFP, Contributor to Financial Finesse
1) Think about the future. Like every other age group, Millennials had retirement as their biggest vulnerability, but they were the only age group not to make it their top priority. Instead, they prioritized more short-term concerns. As a result, Millennials were the least likely to be contributing to their employer’s retirement plan despite showing better cash flow management than some of the older groups.
To put this another way, if you only focus on what you can do with your money today, you might miss even more exciting things you can do with it tomorrow. How about being able to go back to school and pursue a new career? Start your own company? Buy your dream home? Retire early? Have some fun daydreaming about what your future life could look like. Then set some concrete goals and figure out how much you need to save to make them happen.
2) Pay yourself first. I’m sure you’ve heard this cliché many times, but there really is something to it. The idea is to put some money away before you even have a chance to spend it. After all, the money you save is the money you actually get to keep.
The easiest and often best way to do this is with your employer’s retirement plan since the savings come right out of your paycheck. At least try to contribute enough to get your employer’s match. Otherwise, you’re leaving free money on the table.
3) Consider a target-date retirement fund. If you’re like most members of your generation, you’re probably pretty new to investing. This is why Millennials report the lowest percentages that have a general knowledge of investments, feel confident in their asset allocation, have taken a risk tolerance assessment, and periodically re-balance their portfolios. This lack of knowledge may also be why Millennials made investing their second highest priority.
But there is good news. You don’t need to become Warren Buffett overnight. Instead, an increasing number of retirement plans are now offering target-date retirement funds that do a lot of this work for you. These funds are designed to be fully diversified one-stop shops that automatically become more conservative as you approach your target retirement date so all you have to do is put your money in the fund with the year that’s closest to when you think you might retire.
The one caveat to this is that if you’re squeamish about the market, your corresponding target-date fund may be too aggressive for you. In that case, you can choose an earlier target date or see what tools your plan offers to help you put together a portfolio that matches your comfort level. The key is to find something that you can stick with and not bail out of during the next inevitable market downturn.
4) Contribute to a Roth IRA. Once you’ve captured your employer’s match, the Roth IRA has several advantages over other places to put your hard-earned money. First, unlike other retirement accounts, you can access your contributions at any time and for any purpose without income or penalty taxes applied. That’s important because one of the first things you’ll want is savings (at least 3-6 months of necessary expenses) that you can easily access in case of an emergency (and the Bank of Mom and Dad doesn’t count). Not having such an emergency fund was Millennials’ second biggest vulnerability. Just be sure to keep the Roth IRA in something safe and easily accessible, like a savings account or money market fund, until you’ve accumulated enough emergency savings outside of the Roth IRA. At that point, you can invest it in something more aggressive for retirement, like a target-date fund, or use it for a short-term goal like going back to school or a down payment on a home, both of which allow you limited access to earnings without incurring a penalty tax.
The second main advantage of the Roth IRA for you is that the earnings grow to be tax free after age 59 1/2. That may seem like a long way off, but the longer it is, the more time that money can grow and compound. For example, contributing the current maximum of $5k per year for 40 years at an average 8% rate of return would get you about $1.3 million tax free. With 20 years, you’d only have about $230k. That’s a pretty big reason to start early.
The downside to this tax-free growth is that it won’t do anything to reduce your taxes now. But this is the age when people typically earn the least, so your tax bracket is likely to be higher down the road. Why not get the tax break then? This doesn’t even factor in the higher tax rates that might be needed to help fund Social Security, Medicare, and Medicaid for the retiring Baby Boomers.
5) Know good debt from bad debt. Debt was the third highest vulnerability and the third highest self-selected priority, but not all debt is created equal. Although it may not feel this way, your student loans may be good debt. Good debt is basically any debt with an interest rate that’s lower than what you can expect to earn by investing money (generally 6-8%) instead of using it to pay off debt. On the other hand, if you have credit card debt, that’s probably bad debt, and you can save more in interest by paying it off rather than what you’re likely to earn by investing that money.
To get debt free as quickly as possible, try to put extra money towards the debt with the highest interest rate. As one balance is paid off, you can then put those payments towards the one with the next highest rate. You can use this calculator to see how quickly you can pay off your debts with this DebtBlaster strategy.
6) Use technology to better manage your money. With all this money going into retirement accounts, emergency savings, and paying off credit card debt, you might be wondering how you’re going to manage the rest of your expenses. After all, cash flow was already the top priority for Millennials.
Fortunately, one of Millennials’ greatest strengths is their comfort with technology. While this has translated into using LivingSocial and Groupon to save money, you can also use the Internet to manage your overall cash flow. Sites like Mint and Yodlee MoneyCenter will track your expenses online for free and allow you to access the information on your smartphone as well. You can then have the sites alert you by text or email if you start going over budget in any area.
7) Keep an eye on your credit score. Only 31% of Millennials reported owning a home. If you want to buy a home someday, your credit score will feature prominently in what mortgage interest rate you’ll qualify for and hence how much home you can afford. You can start by getting copies of your credit reports at annualcreditreport.com and fixing any errors you find. You can also use a site called Credit Karma to get a free credit score and, more importantly, see how various actions like paying off a credit card and opening a new one could affect it. The site also offers free credit monitoring to alert you in case of identity theft.
The biggest factor in your credit score will be a history of making timely payments. If you don’t have a credit card, you may want to open one to start building a credit history. To make sure you don’t miss payments, set up your credit cards on auto-pay. Even better, set the auto-pay to pay the full balance off each month to avoid getting charged any interest.
With the continuing weak state of the job market, the disappearance of traditional pension plans, and the impending bankruptcy of entitlement programs, you face a host of challenges as a Millennial. But you also have two of the most powerful forces on your side if you choose to use them: time and technology. So what will you do?
Erik Carter, JD, CFP is a Resident Financial Planner at Financial Finesse, the leading provider of unbiased financial education for
employers nationwide, delivered by on-staff CERTIFIED FINANCIAL PLANNER™ professionals.
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This article is provided courtesy of Forbes.com. For more articles like this one on personal finance and
investing, visit their web site at Forbes.com.
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