For Millennials, financial obligations are more overwhelming than they were for both Generation X and Baby Boomers before them. This shouldn’t come as a surprise since this generation arguably has faced more economic uncertainty than any generation since those who lived during the Great Depression1.
A lot of Millennials are delaying important things like saving for retirement or typical milestones like buying a house. Many Millennials’ financial habits aren’t ideal, but that’s because many are too worried about today’s obligations to prepare for the ones they’ll face tomorrow. However, when it comes to planning for the future, there’s no time like the present.
How to Save Money as a Millennial and Get Your Finances in Order
What do you do when you decide to take a vacation? You plan for it. You determine the costs and savings necessary to create your ideal vacation experience. Why wouldn’t you do the same for your financial future? Creating a personal financial plan and setting goals shouldn’t be a problem that you put on the back burner until you decide to buy a house or retire.
Of course, saying you need a plan and actually coming up with one are two very different things. Learning how to save money when you’re young might seem daunting — especially if you don’t know where to start. The following are some Millennial money tips that can help you create a plan and stick to it:
1. Get a clear view of your income and expenses
The most basic saving tip for Millennials is to sit down and look at your income and expenses each month. Figure out what spending is necessary, what is discretionary, and how that spending measures up against your regular income. Creating a personal financial plan isn’t possible if you don’t know how much you have to work with. If you need a little help, there are many apps that can assist you in tracking your spending and income easier than ever.
2. Develop a strategy to tackle debt
Most Millennials don’t define financial success as being rich; they see it as being debt-free. Whether it’s credit card debt, student loans, car payments, or healthcare bills, chances are you have some kind of debt you’d like to eliminate to get your finances in order. It’s important to figure out not only how you’re going to pay your debt off, but also where you should start2. We provided an example strategy below:
- Figure out where you’re able to make the most of your money. If you can, make contributions to employer-sponsored retirement plans — up to the level of any company match.
- Pay down debt with the highest interest rate (at least 7% to 8%) that isn’t tax-deductible, such as credit card debt.
- Make maximum contributions to tax-advantaged investment accounts, like a 401(k) or IRA.
- Start paying down high-interest debt that is tax-deductible, such as student loan debt.
- Contribute to investment accounts without tax benefits, where returns presumably will be greater than the interest rate on your remaining debt.
- Move on to paying debt with an interest rate of 6% or lower.
3. Take advantage of employer benefits
If you’re lucky enough to get employer benefits, you should take full advantage of them. Determine whether you have a retirement plan, such as a Roth 401(k) or 403(b), and when you’re eligible. You should try to set aside 15% of your net income for retirement — and you should start saving ASAP to create good Millennial financial habits. If you can’t afford the 15%, you should at least put in enough to get any company match that’s offered and then try to increase your savings percentage each year until you reach the 15% goal.
Find out about your health insurance options, too. For young and healthy individuals, a high-deductible health insurance plan often makes sense — especially if you can open and fund a health savings account with it. Many companies also offer flex savings accounts that can be used for dependent care. For example, you can have up to $5,000 deducted from your pay annually that you can use for daycare expenses (and you don’t pay taxes on that $5,000).
4. Evaluate your insurance
Being young means that your earning potential is likely your greatest asset. So, it’s important to protect it with life and disability insurance, particularly if you have dependents.
Term life insurance is generally the best route; it’s relatively inexpensive and covers you for a specific amount of time. Get enough life insurance to pay for a funeral, pay off debts, and replace your income — if you have children, you should at least try to cover the length of time your children will live at home.
Disability insurance is usually more costly than life insurance, but that’s because more people use it. In the event your ability to work is hindered, this money can replace your income. Many companies offer some level of disability insurance and give employees the option to buy additional coverage.
5. Execute estate documents
At a minimum, every adult should have a medical power of attorney (POA) and healthcare directive. Your parents cannot access your health information any longer, which means you need to choose someone to make health decisions for you if you’re unable to do so.
In addition to a medical POA, you should also consider a financial POA — someone who can take care of financial, administrative, and legal matters should you become incapacitated. You should also have a will that states who will take care of your children if something happens to you.
Being a Millennial means being used to uncertainty, but that shouldn’t prevent you from creating a personal financial plan to get your finances in order. Even in the most uncertain of times, clear goals and a solid plan can help guide you to a future that is secure and financially stable.
1 Wall Street Journal, A Guarded Generation: How Millennials View Money & Investing
2CNBC, Millennials with debt feel more confident—and 40% expect to wipe out their balances in less than 5 years