By Barbara Delaney, Founder StoneStreet Advisor Group
Those that reached young adulthood around the year 2000 are considered millennials. The 2015 U.S. Census data estimated the millennial population at 83.1 million, surpassing the baby boomer population of 74.9 million. In other words, millennials account for one-quarter of the nation’s populace. Like most generations, millennials will have challenges ahead of them. One of their greatest challenges may be on an economic level. The economy has changed dramatically since baby boomers came of age. The young boomers enjoyed a strong economy due to the massive post-World War II growth our country experienced. Sure, baby boomers saw shifts in economic conditions, but they were spared the Great Depression, and in theory, most were in a strong enough financial position to weather the Great Recession. Millennials came of age just as the prosperous bubble we lived in for years collapsed and spirited in some of the most unstable economic times the world has experienced in seven-plus decades.
While the current financial state appears to portend fiscal gloom-and-doom for our next great generation, it does not, by any means, have to. For better or worse, technological advances have changed the way most of us live. Millennials grew up with this technology, making them the first digital native generation. However, good, old fashioned fiscally responsible practices should never be overlooked or ignored. So, let’s examine how millennials can build a strong financial foundation for their future.
First and foremost, young people should create and maintain a budget. Millennials are actually doing a pretty good job of this. According to a 2015 T. Row Price study, 75% of 18 to 34 year-olds surveyed said they carefully tracked expenses, baby boomers were only at 64%. And 67% of those millennials stuck to their budget, again, surpassing boomers. Creating and tracking budgets are easier than ever. There are tons of apps and various types of software that will do most of the work. While technology can add, subtract and remember for us, we still are the ones that have to create the budget. This is where the older generation can help. Millennials may run circles around older folks when it comes to manipulating technology, but there is no substitute for wisdom gained from years of experience. Parents and mentors should offer advice and real-world examples.
Millennials need to understand that maintaining a budget may require some sacrifice. Millennials (and everyone else) should be able to weigh the importance of spending money to indulge a want versus using that money for a need. Yes, it may be a once in a lifetime chance to get front row seats to a Lady Gaga concert, but it is probably more important, if not as much fun, to use that money to perform vehicle maintenance. If the millennial in your life hasn’t asked for your advice, offer it anyway – remember, they may be smarter than us, but they haven’t lived long enough to be wiser.
Now it’s time to talk about building a credit score. Credit has become a part of everyday modern life for Americans. It is unrealistic to expect to pay for all transactions with cash, particularly, with the dominance e-commerce has in the marketplace. Additionally, building a credit history is vital to preparing for one’s future, and that history can only be built by using credit. Without a credit score, few people would be able to make any large-scale purchases like buying an automobile or home. Credit can often serve as a lifeline when an unexpected event or an emergency happens that necessitates an expenditure that can’t be covered by the cash-on-hand. However, credit can be a double edged sword if managed without the strictest of discipline.
It goes without saying, that making student loan payments on time each and every month will be a big aid in building a good credit history. Credit cards can also help build that all important credit score, but they can damage it too, sometimes severely. Credit card companies make money when people use their product, the credit card. Therefore, as a business, they try to get as many people as possible to use them. Like most retail establishments, credit card companies aggressively market their goods, including offering what may seem like fantastic perks. If managed with self-control, millennials can truly benefit from having a credit card or two. But without that discipline, millennials can ruin their financial future before it has even started. Don’t accept a credit card with a high limit – a college student should be fine with a credit limit of $500 to $1,000. Few, if any, college-aged consumers need a $5,000 or $10,000 limit. Before accepting a credit card read and understand all the fine print. Examples include low introductory rates, which is something that should be taken advantage of, but it is important to understand how the rate will increase when the introductory period has ended. Many cards offer points based upon usage, and those points can be used to purchase other goods and services. Before your millennial gets all giddy about trying to accumulate enough points to buy an airplane ticket to Mardi Gras, teach them to do the math. Most cards that offer points also come with an annual fee. For example, if the annual fee is $450 and that ticket to Mardi Gras is $400, the points perk isn’t really such a perk after all.
Graduation day has arrived, and your millennial is now in the process of launching their career. With all the excitement of a job offer in their dream industry, it is easy to forget about the mundane stuff. But the unexciting questions may be among the most important. Make sure he/she asks what type of health insurance is offered, and if a High Deductible Health Plan (HDHP) with a Health Savings Account (HSA) is part of that insurance offering. They need to know if their potential new employer offers things like a 401k or other type retirement plan, as well as matching student loan programs, continuing education reimbursements, and/or free services like financial coaching. These benefits are tangible; thus a monetary value can be assigned. Make sure that value is weighed into the offer decision.
When someone is young and healthy, it is hard to believe that a day may come when they are not. Thus, it is crucial your millennial understand that health insurance benefits are among the most significant offered by employers. Approximately 60 percent of bankruptcies are medical related, and health costs continue to rise each year. If an HDHP/HSA is available, it should be taken advantage of. Starting an HSA at a young age, and playing a proactive role in shopping for healthcare can produce a large safety net and fat nest egg decades down the road. Millennials must take the time to learn about all the great rewards starting an HSA early in age can reap.
Lastly, teach millennials about saving. There are different types of reasons for savings, the first one they should focus on is an emergency fund. Everyone, of every age, should have at least 5 percent of earnings set aside in a liquid fund for an emergency. The next type of saving that an emphasis should be placed upon is retirement. Max-out 401k contributions and gradually escalate the contributions as income grows. Saving does not have to require complete self-discipline if automatic payroll or bank deductions are used. Specified amounts can be automatically taken from each paycheck and diverted into the account of choice – it’s simple, just set it and forget it. When it comes to investing some of those savings, it would be wise to keep the money where it is made. Putting as much as possible in investment accounts, like 401ks, that are managed by employers is always smart. Take advantage of what company’s offer to gain as many tax advantages as possible while benefiting from the greater purchasing power a group can provide. Also, always ask if employer offers a Roth Feature in the plan.
Chances are, giving up a tax deduction in turn for all the benefits of a Roth is a much better option, especially while young.
A characteristic of an evolved and civilized society is the desire to see the next generation live a better life than the current one. Our millennials are poised to be the smartest, most technologically advanced generation this earth has even seen. But baby boomers must do their part by imparting the importance of sound financial judgment and practices to the future masters of the universe.