Priority One : Set Priorities
The good news is, millennials are better savers than any other generation. The bad news is, you aren’t really into creating a financial master plan to fund your future. Studies indicate that for many of you, today’s lifestyle takes precedence over tomorrow’s security. If you’re expecting to retire on Social Security, here’s a wake-up call: today’s benefits top out at less than $200 a week for an eligible individual. After rent, insurance, food, heat, light, etc. there’s not much left for the Ubers, lattes and weekend getaways you’re currently enjoying. Even if you were guaranteed that there’d still be Social Security when you’re ready to retire, are you willing – and able – to live on so little? You need a plan, and it has to be built on specific goals. While everyone’s priorities are their personal choice, here are the most compelling goals your peers are setting.
1. It's All About You
First, you must assume you are entirely responsible for supplying all the money you’ll need in your lifetime. It’s a daunting thought, but by taking action now you can ensure a comfortable future. And if extra money comes your way from Social Security or other sources, it’s gravy that’ll make life even tastier.
2. Unload Those Loans
It’s no surprise that paying down debt is a top priority, when there’s about $1.4 trillion to pay back. This adds up to about 9 million borrowers repaying an average of $26,700 per student. This debt, coupled with the lower salaries of today’s workforce, are putting many other priorities out of reach, such as buying a car, homeownership, getting married or having a child. Many young earners can’t even afford to move out of mom’s house and into their own place. This debt’s got to go, so you can get on with your financial life. Tip: there are resources out there to help make repayment easier, and even to reduce what you owe. See our section on Student Loans for details.
3. Expect Emergencies
Build a financial cushion to ease the pain of unforeseen problems. Rule of thumb: your nest egg should cover six months’ worth of living expenses. It’s your safety net if you lose your job, develop health issues or have unexpected expenses. Tip: arrange to have a small set amount of every paycheck auto-deposited into a special emergency account. It’ll grow quickly, and enable you to handle emergencies without touching any retirement savings you may have.
4. Start Funding Your Future
If you begin saving in your 20s, you’ll maximize the benefits of compound interest, and build a sizeable nest egg. The easiest way to do that is by getting a job that offers retirement benefits. Employer contributions to a 401(k) equal free money that compounds quickly. Matching programs deliver a 50% return. Tip: get vested. Find out when your employer starts contributing to your 401(k) then stick with the job long enough to take advantage of it. If your company doesn’t offer benefits, set up your own retirement account and have a little money sent to a direct-deposit IRA, Roth IRA or investment account. You won’t miss the money and you won’t miss a payment to yourself.
5. Help is Not a Four-Letter Word
It’s not easy creating a blueprint for your financial life. But it’s a lot easier with guidance. According to a recent study, developing a financial plan was a priority for 39.7% of respondents. Yet only 8.2% have used financial planning software. Tip: take advantage of the wealth of information out there. Find a program that resonates with you. See if your employer offers resources. Or speak with an advisor who specializes in the challenges and goals of millennials.
Saving Your Money
Despite substantial loan debt, notoriously low salaries, and ‘live for the moment’ tendencies, Gen Y is developing a saving habit. More millennials are socking it away than Gen X and Boomers, and you’re saving more this year than last year. Overall, that’s great news. But not for everyone. Surveys indicate that 1 in 6 millennials has $100,000 or more in savings. They also show that 4 in 6 have absolutely nothing saved for their future. Wherever you fall on this savings spectrum, there are steps you can take to increase your nest egg, even on a small salary. First, don’t confuse income with net worth. It’s not how much you earn, it’s how much you save, that puts you on a sound financial track.
Never Save Leftover Money
There usually isn’t any. You probably spend everything you take in. That’s why it’s critical to pay yourself first. Decide on a realistic percentage of your of income, then automatically stash it in savings, and leave it there. $20 a week (the price of one movie) adds up to over $1000 a year. And you won’t even miss it. Don’t forget to increase your savings amount with each raise.
So Long, Subscriptions
Do you really need HBO, Hulu, and Audible? Sure, it’s just a few bucks a month. That’s exactly how the companies snag you. Choose a single, less costly option, like Netflix. Then hit the local library for books, music and movies, both actual and digital. Don’t forget to cancel those magazines too, and read free, with the Zinio.com app, available through the library.
How Much is Enough?
That’s not an easy question to answer. How many future college educations will you have to pay for? How many years will you work? How many raises can you expect? How will your housing costs change? How much will your investments return? All you can do is hope for the best, prepare for the worst, and let the power of compound interest power your savings.
That said, here are some snippets of advice from money experts:
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Begin your saving strategy by building an emergency fund. It should contain enough money to cover at least three months of living expenses. It should be used only for unforeseen emergencies, and replenished as needed. That fund should also be adjusted upward as your expenses grow.
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Your goal should be to accumulate a retirement nest egg that is at least 25 times your annual expenses. (Be sure to factor in the changes mentioned above. And expect to deal with higher rates of inflation and rising healthcare costs.)
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The sooner you start, the more savings can grow through compounding. Try to save 25% of your gross income in your twenties.
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Ideally, you should have at least one year of salary saved by the time you’re 30.
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At 35, strive to have saved two times your annual salary.
It’s not as difficult as it sounds, but the key is to start young. For example, say your goal is to save $1,000,000 when you retire at age 67. Let’s assume that with a combination of savings, IRAs and 401(k)s and investments, you reap a 10% return. If you start socking away just $35 a month from age 22 to 67, you will easily hit your $1,000,000 target. But if you wait til you’re 40 to save for your million-dollar goal, you’ll need over $600 a month to achieve it.
How is your does your net worth stack up to the average millennial? thecollegeinvestor.com breaks it down for you, year by year.
The Ins and Outs of Investing
The blaring headlines are everywhere: many Americans have inadequate (or nonexistent) retirement savings. The good news is, nearly 3/4s of millennials are actively saving for retirement. The bad news is, your conservative approach may mean your savings will not grow enough to fund it.
Live for Today...Save for Tomorrow
You get it: while you value the joy of living in the moment you are well aware that you will probably get no outside help in funding your retirement. You’ve seen how quickly wealth can be reduced. So you prefer to invest your money in a savings account, where it’s safe, insured, and gathering interest. That’s nice, as far as it goes. But sadly, it doesn’t go far enough to keep up with rising prices.
Savings vs Investing
Interest rates on savings took a major hit in the 2008 crash, and they haven’t come back. Today’s banks offer a fraction of 1% interest. Inflation is expected to be at 2% through the end of this decade. That means your savings account is basically losing money. The stock market has delivered an average of 6.9% return for the last 10 years (and that average includes the 2008 plummet.) Let’s say you put $1,000 into a savings account ten years ago. You’d have $1,165 today. That’s an ROI of less than $12 a year. If you bought $1,000 in stock your investment could be worth over $12,5000 this year.
Ditch the Fear Factor
Like most millennials, you may still be a bit leery of stocks, which can vary greatly in value as the market swings up and down. True, that can be scary. But the element of risk always comes with the possibility of rewards, and stocks can be really good at delivering those. Which means they can help your nest egg expand far more dramatically than other investing instruments. And when stocks’ volatility is tempered with more stable investments, such as bonds and mutual funds, you could end up with a retirement portfolio that delivers maximum returns and minimum ‘agita.’ Bottom line: stocks can help outpace inflation and ensure a comfortable retirement. Which means that keeping all your cash in savings may be the riskiest move of all.
Millenials and the Market
Here are a few facts that will ease your mind when it comes to investing:
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The market is now, always has been, and always will be, volatile. That’s its nature, and so, in a way, volatility is predictable and expected.
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Historically, the market has been up more time than it’s been down. For example, in the 50 years ending 2015 the market ‘corrected,’ losing 10% or more of its value, 27 times. And it recovered all its value every single time.
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The best antidote to market volatility is time. And you have all you need! Investing young gives you the power to ride out the market dips, hold onto your stocks for the long haul, and potentially come out a winner.
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Pay off your high-interest debt. Say you have a $2000 credit card balance, at 17% interest. If you invested that $2000 you’d need to earn 17% return just to break even. That’s more than double the 10-year average ROI, so it’s highly unlikely to happen. Ergo, getting that expensive debt off your back ASAP is the smartest way to spend your money right now.
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Fully fund your emergency account. You need 3-6 months of living expenses to cover the ‘what-ifs.’ And keep that account separate.
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Feed your 401(k). It’s all about a comfortable retirement. So max out on your IRA and 401(k)s, especially if you get employer contributions (aka free money.)
How Do You Know You're Ready?
Rule of thumb: your aim should be to start investing after you’ve built your firm financial foundation. That’s why experts suggest you take care of these money matters first:
Ace Your Asset Classes
Here’s a quick run-through of investing basics.
The information below is for informational purposes only and should not be construed as investment advice. Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results.
Stock
When you buy stock, you are actually buying a tiny piece of ownership of that company, aka equity shares. How much your investment grows depends on the success of the company. If it does well, the value of your shares of stock will grow.
Stocks offer two ways to earn money:
Dividends – when a company is thriving, they may share some of their profits with shareholders by paying them a dividend. You can take the cash or reinvest your dividend in more shares of company stock.
Capital gains – when the value of your stock becomes greater than the price you paid for it, you can sell your shares and make a profit.
The stock market, as you know, cycles from strength to weakness and back, taking the value of your investments along for the ride. And as the stock market goes down, the value of other types of investments might rise. That’s why experts extol the wisdom of diversifying your portfolio (aka asset allocation.) And that’s where these next categories come in.
**Stocks are subject to market risk; prices can vary and there is no guarantee of return
Bonds
Unlike owning tiny shares of a company, a bond is a loan that you make to the government, a corporation, municipality, or other entity. A bond’s interest rate is set at its issue, and does not change. In exchange for your loan, you receive regular interest payments for a specific length of time, plus repayment of your principal when the bond matures. Although considered more secure than stock, bonds do come with risks. You can lose money if you sell any type of bond before it matures. Also, bonds are rated as to their risk level, from AAA (high grade) to BB and below (speculative or junk bonds) which could end in default.
Here are some bond scenarios:
Pay par – a new bond is issued and you pay full face value (par), because it offers you a very competitive interest rate over its term (eg, 10, 20 or 30 years.) So you collect the interest and at maturity you are repaid your original investment.
Pay below par – interest rates have risen since the bond was first issued, so it’s not as tempting for investors. To compensate for the reduced interest income, you are offered a lower-than-face-value purchase price. In other words, the bond goes ‘on sale.’ At maturity, you receive the full face value. Plus you get whatever interest income was earned along the way.
Pay premium – interest rates go in reverse: the bond’s issue rate is higher than what is currently available. So you are willing to pay higher-than-face-value in order to get that higher interest. You’ll only get the face value when the bond matures, but theoretically the interest you enjoyed along the way will more than make up for it, making it a good investment.
US Treasury Securities are considered the safest bonds. Some of the many other types include mortgage-backed and international.
**Interest rate payments aren’t guaranteed as a bond can default
Mutual Funds
Ever hear the expression ‘don’t put all your eggs in one basket?’ A mutual fund is the best way to avoid that. It is a collection of stocks, bonds and other securities, which are bought and sold by a fund manager. When you invest, you are buying a small share of the entire fund, rather than owning a piece of every security within that fund. Mutual funds can hold hundreds or more stocks or bonds, so they are highly diversified investments. This helps reduce market risk, because if some of the stocks go down, others in the fund will hopefully go up, compensating for any loss. So how do you know how much a share is worth? By calculating the net asset value (NAV) of all the different securities in the fund divided by the number of shares. Mutual fund shares are traded constantly throughout the day, but their prices are adjusted at the end of each business day.
Here are the advantages of mutual funds:
Diversification – with a small investment, you can have access to tons of different securities.
Simplicity – it’s an easy way to acquire a whole portfolio of different stocks and bonds, with basically no knowledge needed.
Effortless – no need to follow the market, analyze trends or make buy/sell decisions. Your fund’s professional manager does it all for you.
Access – many funds focus on specific areas of the market, such as tech, pharma, social media, etc. These ‘sector funds’ enable you to pick and choose the asset types you prefer to invest in.
**Please consider the investment objectives, risks, charges, and expenses carefully when selecting a mutual fund. Some mutual funds may have higher fees than others. The prospectus, which contains thisand other information about the mutual fund, can be obtained from your financial professional.
Index Funds
Rather than having a manager buying and selling individual stocks and bonds, this type of mutual fund has a portfolio that matches a particular market index, such as the S & P 500. In other words, Standard & Poor selected 500 stocks that represent the overall market. This ‘index’ is watched to reflect the condition of the market. So an S & P index fund would duplicate those same 500 stocks. A Dow Jones Industrial Average fund would consist of the same 30 large US stocks that are included in that portfolio. Index funds enable investors to access the stock market’s potential without having to choose individual stocks. And they don’t require the ‘hands-on’ management of mutual funds, so they have lower fees.
**An Index fund may provide a lack of flexibility and may miss out on market opportunities
Exchange-traded Funds (ETFs)
ETFs have become the investment of choice for millennials. This is a type of mutual fund, consisting of a ‘basket’ of hundreds or even thousands of stocks or bonds. But it is traded like an individual stock, and its value can rise and fall throughout the day. Most ETFs are index funds, tracking the companies of a particular index. But there are also ETFs that use non-traditional indexes, as well as ones that reflect specific market sectors. ETFs aim to track an index, not outperform it. This ‘passive management’ requires only minor activity. And rather than depending on a savvy manager to grow your investment, an ETF enables you to grow via the power of the market itself. With lower costs, tax advantages, and low investment requirements, it’s no wonder millennials accounted for more than half of all ETF investors last year.
**ETF investing involves principal risk—the chance that you won’t get all the money back that you originally invested—market risk, underlying securities risk, and secondary market price risk
A Bit About Cryptocurrency
This below is intended for educational purposes only and is not a recommendation for or against cryptocurrencies.
Hard to believe that a generation that’s leery of the stock market has developed a taste for investing in such an unpredictable and volatile commodity. (Not to mention that most of us aren’t sure exactly what it is.) So let’s start with a bitcoin breakdown: in broad terms, bitcoin is a peer-to-peer monetary system that eliminates the banking system. Bitcoins have value just like regular money, but that value fluctuates throughout the day, based on supply and demand. Like actual currency, a bitcoin can be broken down into smaller pieces of currency (like changing a dollar into nickels and dimes.) But unlike dollars, nickels and dimes, which you can hold in your hand, bitcoins are digital (like the paycheck that’s direct deposited into your checking account.) There is a finite amount of bitcoin available in the whole world, and it is usable globally, and worth the same everywhere. And every bitcoin transaction takes place via computer and the cloud. As people collect and spend this cryptocurrency, it is tracked on a massive public ledger called a blockchain. You can buy bitcoins, or earn them by using your computer smarts to verify and support the transactional processes and other mathematical requirements of the virtual currency system. This is called mining. The bitcoins you buy or earn are delivered to your computer via your secret password or ‘key.’ Forget your key? You lose all your bitcoins.
Cryptocurrency was developed in 2009 as a means of making online payments. Expedia, Overstock, and Microsoft are among the companies accepting bitcoin. But a large number of people have started investing in bitcoin, hoping to net gains as their value rises. In one year alone, it increased in value more than 20 times. The next year its value plummeted by 80%.
Unfortunately, digital currencies have been frequent targets for cybertheft. If you’re thinking of investing, here are some other facts to ponder first:
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It is not backed by the government or central bank, such as silver or gold. Instead, it is only as valuable (or worthless) as people think it is.
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It isn’t traded on the stock market, and can’t be bought through a stockbroker.
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You need to create a special account, or ‘wallet,’ for bitcoins, and though you can then link it to a traditional banking account, it is much less liquid than regular money.
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Volatility is far greater than other forms of currency, opening the door to rewards but also to more potential risk than traditional investments.
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The virtual currency environment is susceptible to higher levels of theft and fraud. Criminals feast on this unregulated market, and hacked investors have no protection or recourse.
Nobody can tell how the bitcoin market will evolve, and where its price and value may swing. However, experts agree that blockchain technology will endure, and may be instrumental in transforming future financial transaction processes.