I received two degrees from an accredited state university, love attending Sunday brunch, and understand little about budgeting and managing my finances. Two of three things supposedly define me as a Millennial. Okay, three out of three are characteristics of a Millennial, but everyone, regardless of age, loves crustless egg-based Italian dishes enriched with additional ingredients of their choosing.
Unfortunately, not everyone of the Millennial generation is financially literate. Studies show that a majority of young people’s lack of understanding is a trend that has been consistent over the past decade — and one that shows few signs of improving. This coming during a tumultuous period when young adults face uncertain fiscal pressure and higher personal debt, and yet must take greater responsibility for their financial future.
Most twenty-year-olds fail at answering basic questions about stocks, mutual funds, and interest rates, and fewer than 40 percent of workers in their 20s participate in employer retirement plans. Millennials disdain running — they sure as hell won’t be partaking in any 401Ks this New Year and definitely won’t be contributing to that guy named Roth and his Irish Republican Army agenda. From the Washington Post concerning Individual Retirement Agreements, “But the fifth annual TIAA IRA survey indicates that a surprising number of people don’t understand them, especially Millennials. And of those who do understand them, many say they simply cannot afford to save another dime… Thirty-five percent of millennial respondents who aren’t contributing to an IRA said they don’t know enough about them to consider using one.”
However, there is evidence that shows young adults can act prudently if provided the opportunity. For example, according to Time Money, if you look at only those millennials who are eligible for 401(k)s, the proportion of participants rises to 70 percent. And among those who are saving for retirement, twice as many millennials as boomers are increasing the percent of income going to their 401(k) each year.
The George Washington Global Financial Literacy Excellence Center (GFLEC), with the support of public accounting firm PricewaterhouseCoopers, conducted a study polling 5,500 respondents aged 23-35 that examined millennials’ financial capability in short-term financial management and medium- and long-term financial planning. Here are some key findings from their combined research:
- When tested on financial concepts, only 24 percent of millennials demonstrated basic financial knowledge.
- On a scale from 1 to 10, 34 percent answered that they are unsatisfied with their current financial situation.
- Fifty-four percent are concerned about their ability to repay their student loans.
- Nearly 30 percent are overdrawing on their checking accounts.
- Two-thirds of all Millennials, and 80 percent of college-educated Millennials, carry at least one source of outstanding long-term debt.
- Fifty-three percent carried over a credit card balance in the last 12 months.
- Of the 36 percent that have a retirement account, 17 percent took out a loan in the past 12 months.
- Only 27 percent are seeking professional financial advice on saving and investing.
To better understand how millennials are managing their money and what they can do to improve, I talked with financial advisor Sara Strohmaier, CFP® at Minneapolis-based firm Wipfli Hewins Investment Advisors about five things that young people can do to better manage their finances for the future:
- Create a budget
- A 50 / 20 / 30 budget formula can be a good place to start, and people can make variations based on what works best for them or what their needs are.
- 50 percent of your income is allocated to necessary living expenses (non-discretionary spending) like shelter, food, utilities, etc.
- 20 percent of your income is allocated toward savings goals like retirement or paying above minimum debt payments.
- 30 percent of your income is allocated toward discretionary spending – things like entertainment, vacations, eating out, etc.
- Creating a budget helps people live within their means and manage debt payments.
- Begin an Emergency Fund
- Everyone should work to have three to six months of non-discretionary spending (mortgage/rent, bills, etc.).
- Funds are there to help cover expenses if you lost your job or had an unexpected expense like a speeding ticket
- Build a Debt Payment Plan
- Try to pay down the highest-interest-rate debt first while continuing to pay at least the minimum monthly payment for any other debt.
- Credit cards tend to have interest rates of 20 to 30 percent, so paying a credit card off each month is a good financial move, and is better for your credit score than carrying a balance.
- Student loan debt and mortgage debt are “good” debt and typically have lower interest rates. Pay at least the minimum payment and extra when you can, but high-interest-rate debt should be paid down faster.
- Contribute to Your Employer’s 401k Plan
- If your employer does a company match contribution to your 401k, you should try to contribute at least as much as the match. An employer match is like “free money.”
- It helps force you to save for retirement since the contributions will be taken directly out of your paycheck
- Start Investing
- The earlier you start investing, the longer your money will have to compound.
- Rule of 72: divide 72 by the average long-term growth rate you expect investments to earn and you will get a rough estimate for the number of years it will take for you to double your money. For example, if you expect an average of an 8 percent return each year, your money will double in roughly 9 years.