Millennials, also known as Generation Y, are a population of people born in the United States from 1981 to 1996. This group faces a variety of financial challenges compared to other generations of people due to a different financial landscape, cost of living and changes in the economy. The COVID-19 pandemic in 2020 also caused further uncertainty for Millennials.
Prior generations typically had a single-employer career and early home ownership. With Millennials, this is no longer realistic and home ownership is often delayed. A Pew study showed that 52% of young adults in the United States are living with a parent. Many in this age group are also dealing with challenges like student loan debt, a sluggish job market, stagnant wages and uncertainty about the availability of Social Security by their retirement age.
Millennials face the most uncertain economic future of perhaps any generation. Because of this, personal finance education and guidance on how to avoid making financial mistakes is important. Here are a few practical financial tips to consider.
Time is Millennials greatest advantage
Time is on the side of Millennials because they have more time to build their financial plan and future than other adult generations. There is simply more time and opportunity to plan, save, accrue compound interest and invest early. Utilizing compound interest, the funds and interest saved are able to compound and grow over time. It is equally important to budget and take advantage of various budgeting strategies.
Breaking down and adhering to a budget earlier definitely helps open up the capacity to save over time. In addition, taking steps such as paying down debt, contributing more to savings and setting up an emergency fund are practical steps that help in the long-run. Small financial actions can lead to big benefits over time.
Millennials know they need to save but may be reluctant to invest and plan for retirement when funds are tight or the financial environment is less than stable. Investing takes persistence, diversification and patience to grow a portfolio. Stock ownership (both direct and indirect, through mutual funds and retirement accounts) is typically thought of for wealthier households but a wide variety of people invest.
Claim "free" money
Some employers offer to match employee contributions to a 401k retirement account. Millennials should take advantage of this by contributing what they can since it amounts to free money. Additionally, some employers may offer work perks that include health and wellness programs or cell phone discounts; it’s definitely worth verifying with your employer.
Typically, an eligible employee is someone over the age of 21, who has been with the company at least one year and has worked for at least 1,000 hours in that year. In 2021, the maximum contribution that employees can make is $19,500 with an additional $6,500 if they are age 50 or older. The employer can also make additional contributions for all eligible employees. Any investment earnings within the plan grow tax-deferred until the funds are withdrawn in retirement.
The flexibility of a 401k
Having a 401k also provides flexibility when changing jobs by allowing the funds to be moved rather than withdrawn. There could be advantages to moving your account funds directly into your new employer's plan. Some Millennials simply choose to cash out their 401k when they switch jobs, but be cautious of the penalties involved.
Increase monthly income
The increasing wealth gap has meant that Millennials frequently start off on their own with less household income. While this was frequently true for previous generations, it is prevalent in the current environment. Many Millennials understand that in order to have a steady or increasing income means that they may need to re-skill, become more mobile, hold multiple positions or actually relocate. Most Millennials will have more than one career or position throughout their lifetime. Many Millennials boost their income by having multiple freelance gigs or jobs.
Ambition, resilience and knowing steps to take when setbacks happen or job loss occurs is important. Many financial professionals recommend having good spending habits and saving a few months of income in an emergency fund. Slowly adding to this fund over time is the simplest and least intrusive approach. Planning and adjusting as needed is very important for singles and for those with partners.