SUMMARY: Research says millennials tend to spend more than their generational counterparts. If this sounds like you, keep reading to find out why these expenses could become a costly mistake.
Millennials face an uphill economic battle. From the Great Recession to stagnant wages, crushing debt to a nearly unprecedented gap between rich and poor, America’s largest generation has its work cut out for it.
But with a handful of small course corrections, our future leaders and innovators can set themselves up for financial success.
1. Don’t ignore your debt.
Millennials collectively have the highest debt exposure—over $1 trillion—of any group since late 2007, with the average 18- to 34-year-old carrying around $36,000 in personal debt. And they’re not feeling good about it—more than 65 percent say they don’t know when they will be debt-free. The majority of this debt lies in student loans, with mortgages as a distant second—the former has ballooned by 102 percent since 2009, while the latter has gone up a mere 3.2 percent.
But there is light on the horizon. Seventy-nine percent have a plan to demolish their credit card debt and expect it to be gone by the time they enter their early 40s. And debt has caused younger workers to reduce their spending, particularly in contrast to their older peers.
Experts recommend putting aside 5 percent of your annual income to take the sting out of debt.
2. Stop avoiding the markets.
While millennials are comparatively good at saving, they typically don’t invest. Chief among the reasons for this is the collective trauma they experienced in the 2008-09 financial crisis, when they saw their parents and peers lose millions in the blink of an eye. Understandably, they are wary of going down that road again.
The numbers bear this out:
- 66 percent look at investments as scary or intimidating, rather than tools to secure a better life.
- 20 percent opt for more traditional, stable investments, including bonds, cash or money market funds, compared to 15 percent of their elders.
Unfortunately, this generation’s avoidance of the markets may put a secure retirement solidly out of reach. Yes, stocks come with risks, but also great rewards. The S&P 500 earned an average 7.9 percent annual return from January 2007 through December 2017, a period that encompasses the financial crisis. By contrast, money market accounts have trickled in at 0.3 percent. Yes, the ups and downs are real and can be difficult to stomach, but at the end of the day, where would you rather put your money?
Millennials who avoid the markets also miss out on compound interest. The opportunity to earn interest on your initial investment and also on your past interest is essential for a stable financial future. A $100 investment over 10 years becomes $259.37. Imagine what $500, $1,000, $5,000 or more could bring you over that same time period.
3. Take advantage of your 401(k) or IRA.
Retirement can seem like a distant dream, and it can be tempting for 20-somethings to use all the extra cash they have in the moment. But a little diligence now can pay off later.
If your employer offers a 401(k)—and particularly if they match contributions—take full advantage of it by putting in the maximum allowable amount, which this year is $19,000. Take the pressure off yourself by opting for automatic contributions so that tax-free money floats magically out of your paycheck and into your account. A holiday bonus or merit-based raise can be thrilling, but put at least some of that into your 401(k). Work toward stashing away 10-15 percent of your yearly income.
Don’t have a 401(k)? Never fear. An IRA is a great stand-in for any employer-based program and allows you to put in as much as $6,000 this year.
4. Cut back spending.
Millennials tend to spend more than their generational counterparts:
- 60 percent drink coffee that costs more than $4.
- 79 percent drop serious cash at restaurants.
- 76 percent want the latest gadget.
- 69 percent covet clothes they don’t need.
- Approximately 50 percent use credit cards to pay for everyday necessities,
These habits have the potential to throw off any long-term plans they may have, such as marriage, starting a family and home ownership.
5. Not asking for help.
Change is hard, particularly when it involves long-held skepticism of financial institutions. In these turbulent times, it can be helpful to have an experienced professional at your side to answer questions and provide encouragement. Our Wealth Advisor Checklist is a useful tool to use to see if that path is right for you.