Generation Y includes those born between 1977 and 1991, ranging in age from 22 to 36 years old. Also referred to as echo boomers and millennials, the group makes up about 25% of the U.S. population.
Millennials are tech savvy. They grew up with laptops, on-line gaming, cell phones, iPads, and other gadgets, and usually prefer communicating through e-mail and text rather than by phone. You might think that this fast-paced, always connected group would be risk-takers with their finances, but that’s not the case. In a report titled “Sowing the Seeds for Retirement: Gen X and Gen Y Markets,” the Life Insurance and Market Research Association pointed out that Generation Y employees not only have low deferral rates to their employer sponsored retirement plans, but they also tend to be conservative investors. According to the 2011 MFS Investing Sentiment Survey, 40% of millennials agreed with the statement “I will never feel comfortable investing in the stock market” and 30% said their primary investment objective was protecting principal. The study also found them to be the most conservative generation of investors since the Great Depression.
This isn’t so surprising when you consider the fact that millennials came of age during the tech crash and real estate/credit bubble. Furthermore, many graduated with significant debt into a bleak job market and were forced by financial necessity to move back home with their parents. But despite their negative experiences, members of Generation Y have no choice but to take control of their financial destiny.
If you are a millennial yourself, here are seven ways to help you do that.
1. Get Educated
Unfortunately, there is little training on personal finance in school/college, so you’ll need to do that on your own. The Wall Street Journal Guide to Starting Your Financial Life is a great book that will help you manage your income and invest for the future. A little self-education will go a long way in putting you on the right track. I also recommend you seek out your parents’ financial advisor and see if he or she might give you some free advice.
2. Get Insured
Many members of Generation Y are out of work, between jobs, or self-employed. As a result, they sometimes choose not to buy health insurance. This is a mistake. Never go without health insurance. The cost of being un-insured is too risky: If a health care need arises, you may get stuck in a financial hole that is very hard to dig out of. The Affordable Care Act requires insurers who offer dependent coverage to make such coverage available until a child reaches the age of 26. So if you are under 26, join your parents’ plan or look for coverage elsewhere.
3. Create a Budget
Create a budget of your fixed and variable expenses. Take a look at your income and paycheck to get an idea of where your income is going. As part of this budget, start saving an emergency cash reserve – enough to live on for at least 6 months — in case of unemployment or emergency.
4. Consolidate Your Loans
If you have school loans, make sure you have done everything possible to consolidate them at the lowest possible interest rate. If you’re uncertain about the best way to manage these loans, seek advice. The loans should obviously be included in your annual budget.
5. Start Using Your Employer’s Retirement Plan
Once you have sufficient cash reserves, begin saving in your employer’s retirement plan to get the companies “free” match (if a matching contribution is provided). If no free match is offered, enroll in the plan and have at least a portion of your income (even if only $25) deferred to it. If you have sufficient income and can afford to save more, then do your best to simultaneously build up your cash reserves, develop a plan to pay off your debt more quickly, and increase the amount you defer into your employer plan.
One important benefit of enrolling in your employer’s retirement plan is learning to have a disciplined savings plan. If your employer does not offer a retirement plan or if you are self-employed, then seek advice about starting an Individual Retirement Account or Roth IRA account.
6. Start a Roth IRA
If eligible, save your next available $5,500 (the limit for 2013) to a Roth IRA and continue to do so until you have built up another 6 months of cash reserves. Savings in a Roth IRA are after-tax, but grow tax-free as long as you meet the Roth IRA rules. One of the aspects of the Roth IRA that makes it attractive for millennials is that 100% of the contributions (the principal) can be taken out at any time without either taxes or penalties. This makes a Roth IRA a great place to build up additional cash reserves. If you need the cash in the future for an emergency, you can withdraw your principal tax and penalty free. If you never need to access the cash, then you have started a retirement account that can grow tax-free forever.
7. Get Familiar with Compounding
One great advantage millennials have over their parents and older generations is time. The power of compounding interest can turn even modest savings today into a large sum of money for future goals/retirement. Do not focus on what happens if you lose money through investing over a short-term (this month or year). Instead, see how much savings you can build up by investing today and compounding that investment over the next 20, 30, or 40 years. You will be pleasantly surprised.
While the idea of getting one’s financial house in order can be intimidating, if you follow the above tips, you will put yourself on the right path for your future.
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