Millennials are more than just a disruptive demographic or a trending topic on the internet. Now turning 18-34 years old, this 85.4 million-strong “selfie” generation will continue to pave the way for more trends and innovation with the last lot of them beginning college this year.
Many of their boomer-aged parents are just hoping for their kids to move out of the house, land a solid job and become a fiscally responsible citizen. Yet many millennials are greatly lacking basic financial wellness skills and are in no rush to leave the nest.
Financial wellness can be best described as a state where one’s financial behavior and outcomes can be directly measured by one’s financial knowledge and habits. Unfortunately, financial literacy and wellness is not something taught at home or the workplace and is not required course work in US high schools or colleges.
Parents, universities and employers should make it a priority to provide some sort of “financial literacy intervention” to this group as soon as possible. The following four areas of financial wellness are essential habits for millennials to incorporate into their daily lives and vocabulary.
“It is not the strongest species that survive, nor the most intelligent, but the ones most responsive to change.” -Darwin
1. Conquer Compound Interest
Einstein stated it best that “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” Simply put, make sure that the “interest” you are earning on your savings is higher than the interest you are paying on your obligations.
Maintain a disciplined money-mindset. Do not be enticed to sign up for every credit card and department store line of credit that comes your way. Credit card issuing banks have a knack for marketing to Millennials before they even graduate from college with snazzy offers and low ‘teaser’ rates. Only utilize a couple credit cards and make sure to pay off your balances each month to build your credit.
Focus to pay off over the next year (or refinance down) any loans or revolving debts with rates above 6%. If you have any obligations with rates below 4%, consider paying those balances off over time while making a concentrated effort to invest for your financial future.
When investing remember the “Rule of 72” when it comes to compounding. The rule of 72 indicates how long it will take your money to double. Just divide your average annual rate of return into 72. With a low 3.4% inflation rate, your cost of living will double every 20 years, so make sure to plan, save and invest wisely over the next 35+ years before retirement.
2. Secure Your Credit Score
Your credit score (and credit report) can affect many parts of your life nowadays, even when applying for a new job. Your online “financial foot-print” can be easy to improve and maintain over time, but exponentially difficult and expensive to fix, whether thrown off from poor financial behavior, reporting mistakes or identity theft.
Younger generations have a considerably larger online footprint than past generations, making them more susceptible to identity theft and fraud. Consider that all thieves need to impersonate you is your date of birth and Social Security number, the first which many people have right on your Face Book page.
No company or site is immune from hacks, not even the IRS. Just over the past year, 700,000 US taxpayer accounts were compromised off the IRS website by cyber-criminals on the “Get Transcript” feature.
You can check your credit report and score for free three times per year from all the major reporting agencies (Experian, Transunion and Equifax) on a site such as annualcreditrport.com.)
If you want to take extra -strong preventative measures from being ripped off, you can elect to put a “security freeze” on all three of your credit agency reporting accounts. A Security freeze is designed to prevent the information in your credit files from being reported to others that request it. You may place, temporarily lift or remove a security freeze on your credit files under state laws.
3. Create a Budget:
Millennials have helped to create and redefine the sharing economy from catching a ride on Uber to posting all their daily minutia and selfies on Face Book. All this sharing and “liking’ can lead to an increase in bad money behavior and impulse purchases while competing with friends and neighbors for “likes” and attention.
While the word budget may conjure up images of stressful spreadsheets with 100 different QuickBooks typed categories, consider instead to follow the “three step” 50/20/30 bucket approach for your household cash flow.
Essentials Bucket: The first 50% of your take home pay should go to Essential Expenses such as a home mortgage or rent (plus utilities), food and transportation. You can also add on any other recurring expenses such as pet care, healthcare, gym memberships, student loans, cable and cell phone bills.
Savings Bucket: The next 20% of your take home pay should be dedicated to Savings Expenses which include retirement savings (such as your 401K), building a cash reserve and paying off any debt. Once you are debt free and have built up a rainy day fund, continue to save 15%-20% from every paycheck to your retirement savings.
Lifestyle Bucket: The final 30% of your take home pay should be dedicated to your Lifestyle Expenses which include your personal expenses and luxury purchases. Items such as your daily Starbucks, dining out, travel, hobbies, entertainment, clothes, jewelry, tech gadgets and other impulse spending items would fit into this category.
4. Invest Wisely:
Developing disciplined saving and investing habits at a young age will put you on the fast track to financial independence and freedom. The first step to sound investing is to create a disciplined asset allocation strategy for your 401K and individual accounts. Do not get sucked into trying to make big-money bets by trading individual stocks that are in the news.
Practicing consistent and on-going asset allocation is the single most important habit for an investor should follow and is the basis for Modern Portfolio Theory. Asset allocation involves dividing an investment portfolio among the three main asset classes-stocks, bonds, and cash.
Your selection of individual stocks and investments is secondary to the way you then diversify your portfolio, which will be, perhaps, the principal determinant of your long term results over time.
Subtracting your “age from 100” to estimate how much of your portfolio should be invested in stocks can be a “very-rough” starting point and estimate to consider. For example, a 25-year-old would allocate 75% to stocks with the balance to bonds and cash.
Our advice to young investors starting out is to keep it simple. Consider that it’s not by “timing the market” that will earn you the greatest reward over time, but rather “your time in the market” while employing a calm, disciplined and repeatable investment management process. To quote Warren Buffet, “Keep things simple and don’t swing for the fences every time you are up to bat.”
You cannot invest directly in an index. Past performance is no guarantee of future returns. Diversification does not ensure a profit or guarantee against loss.
The information given herein is taken from sources that IFP Advisors, LLC, dba Independent Financial Partners (IFP), IFP Securities LLC, dba Independent Financial Partners (IFP), and its advisors believe to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as IFP does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. This report may not be reproduced, distributed, or published by any person for any purpose without Ulin & Co. Wealth Management’s or IFP’s express prior written consent.