Millennials are in a unique situation in today’s financial world. In generations past people went to college or started work right out of high school and tended to stay with that company for many years if not their entire career. And back then companies tended to take better care of their employees when it comes time for their retirement. But in today’s world, many people tend to change employment once every few years if not sooner. And the idea of staying with a company for 30 plus years is a foreign concept to most. And then you have the fact employers are not taking care of their long-term employees the way they once did. So what can millennials do differently from their parents? Well, let us take a look at some aspects of the new financial way of life.
First, I want to go over a concept that applies to everyone, and it is not limited to millennials. In fact, it is something I ask all of my clients in financial planning to perform, and that is to create some sort of budgeting tool to track their spending. This is important because if you do not know where your money is going, you will have no idea where you need to cut or reduce expenses in order to pay your bills and ultimately save for various things. A lot of millennials are opting for the newer approach to budgets, and that is to allocate 50% of your pay to essentials such as groceries, utility bills, and transportation. The next 20% is the allocated to savings for both retirement and emergency type funds. And the final 30% is allocated for lifestyle choices such as gym memberships, entertainment and maybe items such as cell phone plans. But there are other more detailed methods that I tend to try to follow, and I will explain them next.
I tend to find the 50-20-30 method a bit lacking in structure, and I also find it does not provide detailed information that can allow for people to make on the move adjustments when needed. As I stated, I tend to like a budget that has more categories and a more detailed breakdown of expenses. I tend to recommend something more along the lines of the following. First housing should be about 35% of your budget, and that would go for rent or the mortgage, utilities, and any insurance that is owed on the property. Then next would be about 15% for food either at home or eating out in a restaurant. Transportation comes next at 12% for your car and all its expenses or public and shared transportation if you do not own a car. To service your debt sit should not exceed 8% of your pay, and this is one area where people tend to experience the most issues as most Americans tend to carry higher debt levels than most. Now retirement savings is listed at 7% but I really do recommend that be closer to 10% if possible to ensure that you can have the retirement you deserve. The next three areas are all at 5% so we will lump them together and they are cell phones and Internet, other savings such as emergency funds and special wish list items and entertainment. Finally, clothing comes in last at 3% for both business and personal attire.
Another area that I do not think millennials are much different from other is that everyone needs to save as much as they can as early as possible to maximize the power of compound interest. Say you are just out of college and you place $500 into an IRA account and then add $100 a month until you reach retirement, you would have approximately $335,000 if you earned 8% on your investment. But had you waited until ten years to start and then started with $2,500 then added $100 a month at the same 8% return you would have closer to $167,000 at retirement age. As you can see and from my earlier posts it really does pay to start saving as soon as you can for retirement.
Now, most workplaces now have a 401(k) plan that has been established to aid in your saving for retirement. These are great because they will take the funds and generally match them up to a certain percentage and you will never miss the money as it is all done before it hits your bank account. But retirement is not the only thing that needs your attention when it comes to saving, and that is you need a fully funded emergency fund. And that fund should contain approximately six months of living expenses. Proper planning is essential for anyone of any age, but millennials seem to be behind the eight ball as it were when it comes to saving money.
And as I just showed you in the previous paragraph a little bit saved early enough can accumulate into a substantial amount of time. And if you can place the funds into a tax advantage account you are even better off. In 2017 people are allowed to place up to $17,500 into a workplace account and then if you are over the age of 50 you are allowed an additional catch up amount. And for IRA’s provided you qualify for them with your income you can place $5,500 in one on an annual basis, and it too has a catch-up provision as well for those over the age of 50. Now the IRS examines these amounts on an annual basis though they may not change so always check to see what the annual contributions are for any particular year. And the best way to invest is in low-cost funds such as indexed exchange-traded funds or mutual funds.
Now there are also some additional ways in which you can save for retirement besides a 401(k) and an IRA. If you are self-employed which, many millennials are because they have a side “gig” income they may have a few more options. One such option is a SEP IRA which allows you too to save 20% of your income up to a maximum of $52,000 in 2017. But another option that allows you to save more is a solo 401(k) which allows you to save up to the $17,500 then up to 20% of your self-employment income u0p to $52,000 annually.
Benefits are nothing new either, but millennials have a different take on them. Older generations viewed health insurance as a must, but millennials view it as something that can wait. Well, it cannot as no one knows when they will become ill or have a tragic accident. Therefore it is important for everyone to have health insurance at all times. There are many types of insurance policies so do your research and find the one that works best for you and your needs. Some will prefer a traditional policy, and other will go for the high deductible plans. Know what each offers and figures out how it may affect your bottom line in the event of a medical issue.
Another issue that is not limited to millennials is taxes. Many people tend to overpay their income tax payments and then enjoy a large tax refund n the spring. This is poor money management as you are providing the government a tax-free loan when you do not need to do this. So, adjust your W4 and change your withholdings to take home more of your hard-earned money.
Now many financial planners will have you believe that the use of credit is a bad thing. But I think that if used correctly it can be beneficial. There are good credits and bad just like most things in life. A mortgage is considered a good form of credit as that will generally appreciate in value over time. A car is a questionable use of credit as they depreciate immediately. Credit cards that carry a balance are seen as bad forms of credit. So, consider the type of credit and how it is used to decide for yourself if it is good or not.
Millennials are not that keen on rushing out and buying a house as much as previous generations were. They tend to rent as they do not want to be tied down to one area or a job. But that does not mean that there is no need to make a comparison of the pros and cons of owning and renting. And if you decide to own there are things that must be considered such a property taxes and maintenance which you do not have as a renter. Also, there is what could be a substantial down payment. Otherwise, you may face an unnecessary additional cost of mortgage insurance. And if you do not plan on being in one location for at least five to seven years it may be difficult to not lose money on the sale of one property and the purchase of another.
Millennials have a different outlook on finances, but they mirror existing thoughts more than people realize. The major difference is how people approach these differences. If you need additional information or have further questions, feel free to contact me directly or leave a message here.
