Are you in your 20’s or 30’s (or know someone who is), and feel overwhelmed by budgeting, student loans, credit, and retirement? You’re not alone. Here are 5 practical steps to help you establish a path to financial stability.
A recent survey from Ally Financial found that approximately 52% of millennials feel that they need guidance in managing their finances, and they’re worried about adequately planning for their future.
It’s understandable, as the financial landscape for millennials looks a lot different than it did for their parents.
With traditional pension plans falling by the wayside, and many employers no longer offering retirement plans or healthcare coverage, millennials are feeling the weight of the changing economy.
Add that to the stress of paying off student loans in unprecedented amounts (i.e. extremely high), and the future often appears bleak.
The good news is that there’s hope for a stable financial future for millennials. However, their financial planning strategy will look somewhat different than their parents’ and grandparents’ did.
If you’re in your 20’s or 30’s, and are concerned about having too much debt and too little savings, here are five tips for getting on the right track:
1.) Create a job plan.
When looking at the job market just a few decades ago compared to now, it has changed drastically.
The majority of Baby Boomers and those in Generation X (i.e. your grandparents and parents) spent their entire careers working for one company, or at the very least, a decade or two before moving onto another company.
The reason for this is that they were usually promoted within the company and were able to work their way up to a higher position. Unfortunately, in the current job market, you often have to seek out another company in order to get a raise and/or promotion. Sometimes, another company reaches out to you.
Either way, in order to stay in the loop in regards to new job opportunities, create a LinkedIn account and join other networking groups to make yourself visible online and in your community.
Additionally, make sure that your resume is up to date, as well as your professional skills. If there are specific skill sets in your field that will give you a competitive edge, take some online courses and get certified in those areas so that you can add that to your resume.
You may even want to do some freelance work to gain additional experience in those areas too.
While most older adults assume that millennials have been taught how to manage their finances, many of them have never had a financial course in high school or college.
2.) Invest in your retirement funds.
If you’re fortunate enough to have an employer (such as a large corporation) that offers an IRA or 401(k), then it’s definitely a good idea to take advantage of those benefits. This day and age, it’s even more important to put as much money as you can into those accounts since Social Security is not a guarantee.
With the monetary amounts being lowered every year, and the age for eligibility continually increasing, the likelihood of receiving the same amount of social security benefits that your grandparents and parents have is very slim.
While most large corporations still offer retirement perks, many small to mid-sized businesses are starting to dwindle down on the retirement options that they offer since it’s unaffordable and unsustainable. This means that you’ll have to start saving on your own.
Even if you have an IRA and a 401(k), you’ll still need to save outside of those if you want to retire early. If you don’t have those plans,you’ll need to set up a retirement savings account in addition to another separate savings accounts (which brings us to the next tip).
3.) Open two savings accounts.
In addition to a retirement savings account, you’ll also need a regular savings account that can double as an emergency fund and a ‘future purchases’ fund.
If you get laid off from your job or have unexpected medical bills, it’s important to have cash to pay for those needs. You’ll also want to stow money away for large purchases, such as a down payment on a house or a new car(as well as money for any repairs that those things may need down the road).
So exactly how much should you save? A good rule of thumb is to put at least 20% of your income into your regular savings account, and at least 10% into your retirement savings account (if possible, 15% or 20% if you don’t have an IRA or 401(k).
While this seems like a lot, you’ll be thankful that you did when need to make a large purchase or when you’re ready to exit the workforce.
4.) Pay off your student loans as quickly as possible.
Most millennials have student loans, and for some, it’s more than $50,000. While it may seem impossible to get those loans paid off, it can be done in just a few short years if you put as much money as you can toward your balance.
In order to do that, it means not eating out, making your coffee at home, and cutting back on things that aren’t necessities. While it seems like these things won’t make much of a difference, they really do add up.
For example, if you purchase a large latte everyday on your way to work (Monday through Friday), and it costs $4.50 per latte, that’s $22.50 a week. That adds up to $90 a month, which means that you’re spending $1,080 a year on coffee!
That $1,080 can be put toward your student loans, in addition to any money that you’re currently spending on “extras.” While it may seem painful now to cut back on frills, you’ll be so thankful you did it when you’re finally free from those huge monthly payments.
5.) Don’t use credit cards for large purchases – budget instead!
It’s important to look at your net income, and create a monthly budget so that you’ll know how much you’ll have left to save each month after paying the bills for your basic necessities.
If you need to make a large purchase, plan ahead. Wait until you’ve saved enough money so that you can pay cash for it.
While it’s tempting to put appliances, electronics, and other large purchases on credit cards, you’ll regret it in the long run. Paying interest as high as 29.99% (depending on the card) causes stress-inducing debt in addition to any student loans that you already have.
Credit cards in and of themselves aren’t bad, and ironically, are actually necessary to build solid credit. However, you should only use a credit card for charging small purchases, such as gas and groceries, so that you’ll be able to pay it off in full every month.
Also, make sure to use less than a third of your credit limit and pay the balance on-time every month, as this will show that you’re a responsible borrower, and will increase your credit score.
While financial planning may look different for millennials than it did for previous generations, the basic tenet is still the same — save, save, and save some more!
Even if you’re only able to save a small amount each month while you’re paying off your student loans, those “small” amounts can add up to a large nest egg after several years.
Remember that living below your means now will give you a lot of freedom later on in life!