American millennials – people born between 1981 and 1996 – have officially become the largest living generation. According to the U.S. Census Bureau, the population of millennials surpassed that of Baby Boomers by half a million in July 2019. As a fellow millennial, I know that we get a bad rep sometimes (they’ve finally stopped bringing up avocado toast). However, some exciting benefits come along with being a part of this exclusive group.
Millennials are well-positioned to build wealth, especially compared to our parents. A recent study showed that millennials could hold five times as much wealth as they do today by 2030. In fact, we could become the wealthiest generation! Researchers anticipate that when millennials inherit money from their moms and dads, it will be one of the greatest transfers of wealth in modern history.
However, obtaining wealth means nothing if we do not know how to manage it. That’s why financial planning and wealth management strategies are so important. Young people tend to think they have plenty of time to worry about these things. For some, personal finance can be a taboo topic, and they’d rather not talk about it.
Get rid of that notion. I challenge you to start planning for your future self today. Here are several tips to help you get started.
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Best Financial Advice for Millennials
Check Your Credit Report
When getting your financial life in order, you’ll first want to assess how well you have managed debt in the past. Think of your credit report as your “adult report card.” It includes information about the accounts you have, payment history, credit inquiries, and more.
Credit scores help lenders assess your creditworthiness or the likelihood that you will pay your bills on time. Your credit score can impact many different areas of your life – from mortgage rates and lease applications to whether or not you get an offer from your dream job. To learn more, read Surprising Ways Your Credit Score Can Impact Your Life here.
You can access your credit report for free every year at annualcreditreport.com. Beware, many websites claim to provide credit reports – some even charge! Annualcreditreport.com is the only legit website that is directed by the Federal government to provide them.
As the name suggests, you typically can only access your report once a year. However, due to the global pandemic, you can access your credit report weekly until April 2021.
In the U.S., there are three national credit bureaus – Equifax, Experian, and TransUnion. Once you download your credit report from each bureau, review it carefully to make sure there are no errors.
I once discovered that when one of my student loan accounts moved to a different lender, the old company marked two monthly payments as late. I disputed those negative marks, and they were removed from my credit report. Learn how to dispute errors here. Be sure to dispute any inaccuracies with each credit bureau.
Once you’ve confirmed that everything is accurate, take a look at your credit score. If your credit report is the “report card,” your credit score includes your grades for each “class.” You are graded on the following criteria: payment history, credit card usage, derogatory marks, credit age, total accounts, and hard inquiries.
Most credit card companies provide free credit scores; however, you can also use Credit Karma or Credit Sesame. Your score may vary depending on the source. For example, my score on Credit Karma is lower than the score I get directly on the credit bureaus website. However, I like using Credit Karma because it tells you exactly how to improve your score. If you implement those tips, your score will inevitably improve.
Don’t become obsessive about the number, though. I used to check my credit score every month and freak out at the slightest dip. Just focus on doing the things that will help you in the long run. Take the steps today to reverse any negative habits that have impacted your score.
Develop a Debt Repayment Strategy
While we most frequently hear about the student loan crisis, the leading source of debt among millennials is credit cards. This is detrimental to your financial well-being because the interest rates of credit cards are often significantly higher than any other type of debt.
Many people also make the mistake of only making the minimum payment, while accumulating even more debt. This habit leads to a cycle of being “stuck” in credit card debt. However, there is hope! First, stop spending more than you make. Aim to pay your credit card off in full each month. If that’s not possible right now, I have a couple of strategies to help you pay off your debt.
The two most popular debt repayment strategies are the Debt Snowball and Debt Avalanche methods. When following the Debt Snowball Method, you will pay off your debts in order of smallest amount. With the Debt Avalanche method, you will pay off your debt in order of the highest interest rate.
I have an entire article on how to use each strategy and determine which is best for your situation. There are also debt calculators that can help you decide which option will save you the most time and money.
It ultimately comes down to which option will motivate you to stay consistent. With the Debt Snowball method, you will see quick wins by paying off small accounts first; however, you may pay more in interest. Following the Debt Avalanche method typically saves you money; however, it could take a long time before your first account is paid off.
No matter which option you choose, stick with it. Focus on the end goal and reward yourself when you reach smaller milestones.
Build an Emergency Fund
An emergency fund is a bank account that holds money that is exclusively used for unexpected expenses, such as emergency medical expenses, major car or home repairs, or unemployment.
Millennials should prioritize building an emergency fund before paying off debt or saving for large purchases. It may sound counter-intuitive, but you need something besides credit cards and personal loans to fall back on when unexpected expenses come up. Emergencies are inevitable, so save money now.
Some people mistakenly use credit cards as an “emergency fund.” However, borrowing money during a financial crisis can be detrimental to your credit. You could find yourself drowning in monthly payments trying to catch up. Emergency funds, however, create a financial buffer to help keep you afloat during challenging times.
The amount of money you should save in an emergency fund depends on your situation.
A starter emergency fund should be at least $1,000; however, I recommend that you save enough to cover at least three to six months of living expenses. If you have children or a serious medical condition, you may choose to save even more than that.
Consider how long it would take you to replace your income in case of sudden unemployment. What emergencies have you experienced in the past year? How much have you spent on unexpected expenses in the past six months? The most important thing is that you start saving money now, no matter how small the amount.
Automate your savings and pay yourself first, which means allocating a certain percentage of your paycheck to be automatically distributed to your emergency fund before you spend it on any other expenses. When you don’t see the money, you’re less likely to miss it.
Along those same lines, consider moving your emergency fund to a high yield savings account at a separate online bank. Many available options offer more competitive interest rates than traditional banks. While your emergency fund should be readily available, it should not be so easy to access that you can transfer money back to your checking account with a couple of clicks. When it’s easy to transfer money from your emergency fund back to your checking account, it’s easy to use that cash for “emergency fun.”
Start Saving for Retirement Now
A study by Bankrate found that 41% of millennials have no retirement savings. Compared to all other adult generations, we also tend to prefer cash savings over investing in the stock market. This bias could cost us millions of dollars by the time we retire.
Due to inflation, there’s no way that you can save enough cash for retirement without the benefit of compounding interest. Not only will you earn interest on your original investment, but you will also earn interest on the interest that investment has already earned! Therefore, you need to start investing in the stock market now.
I get it – it’s hard to imagine not seeing that money for decades. However, your future self will thank you for creating a long term strategy. The sooner you start, the more money you will accumulate.
So, where do you even begin? Take a look at your employer-provided retirement plan. If they offer a company match on the contributions you make, you need to take advantage. It’s essentially “free money” that can speed up your retirement savings plan.
Some companies are more generous than others. No matter what, contribute at least the minimum that is required to get the full company match. Remember the compounding interest that I mentioned earlier? That will also apply to the free money you receive from your employer! Do not leave any money on the table.
If your company does not offer a 401(k) plan, or if you want to invest above your employer match, consider other tax-advantaged retirement funds such as a Roth IRA or traditional IRA. You can also look into low-cost index funds.
Create a Budget
Hear me out – budgets get a bad rep sometimes; however, I think it’s important for every millennial to have a budget. Rather than wondering where your money went at the end of the month, simply tell it where to go.
Tracking your spending can help you determine where you may be overspending and can save money. It’s also good to become familiar with your spending habits, which reflect your values.
If eating out is important to you, your “Dining Out” budget may be larger than someone who values home-cooked meals. If you want to travel once a month, then do it! Just make sure it is one of the first things you add to your budget. When you budget with this mindset, there’s no way you can dislike budgeting – you created it!
Studies have shown that the key to building wealth is financial goal setting. That’s why I created The Ultimate Budget Binder. Check out How to Create a Budget that Works for a comprehensive guide on budgeting.
Other Financial Tips for Millennials
Create multiple streams of income.
The best tool you have for building wealth is your income. It’s important today more than ever to create multiple streams of income. Start a side hustle or take on a part-time job to help accelerate your debt pay off, save more cash and achieve your financial goals. Use wages from your full-time or part-time job to create passive streams of income, which will provide a steady flow of extra money with little to no effort from you. For some side hustle ideas, check out 12 Incredible Ways to Make Money Online.
Stop trying to keep up with the Joneses.
We grew up with social media, and it’s easy to compare our lifestyles with friends and strangers alike. The truth is, we have no idea what’s going on behind closed doors (or with their net worth). Let’s normalize being honest with our friends when we need to save money. There are many free or affordable entertainment options. Anyone that makes you feel bad for prioritizing your financial goals is not a friend.
If you have children, consider investing in a 529 plan.
A 529 plan is an education savings plan with many tax benefits for you. The best part is that you can take advantage of compounding interest, so start saving as soon as you can.
Don’t be shamed into buying a home.
There’s a lot of pressure out there for millennials to buy a home. Unfortunately, 2/3 of millennials express feeling buyer’s remorse after purchasing a home. Wait to buy a home at the appropriate time for you, not when others tell you you should. If you choose to buy a home, be sure that you have money left over to pursue your other financial goals after all fees are paid. Or, consider investing in REITs if you want to invest in property with slightly less risk.
Final Thoughts on Millennial Financial Advice
There’s a lot of information in the personal finance world about how millennials should manage their money. The tips above will help you get started on your journey to financial independence.
I don’t know about you, but I can’t wait to prove that they were wrong about us. Let’s go down in history as not only the wealthiest generation but also the most generous!