If you’re a millennial, aka Generation Y born between 1980 and 2000, you hear a lot about your age group facing high unemployment and overwhelming student loan debt. The news isn’t all bad: Gen Y saves more than almost every other generation and steadily increases its financial literacy.
Here are some saving and spending steps to keep on track to money success.
A realistic budget. In this important first step toward creating a financial plan, consider the 50/20/30 formula that divides your after-tax income into three buckets:
- Half your income covers expenses necessary for daily living, your non-discretionary spending such as food, clothing, shelter, utilities and transportation.
- 20% goes to meet such long-term savings goals as retirement, as well as any additional debt repayment above and beyond the minimum.
- 30% takes care of expenses you can live without, such discretionary spending as entertainment, eating out, vacations and hobbies.
Look at what you spend versus what you save. Online budgeting tools can also help track spending and make budgeting more convenient.
Put at least 10% of your after-tax income toward such long-term goals as your 401(k) retirement plan and taxable investment accounts. It’s great to save a bigger percentage, just make sure the extra savings don’t prevent you from affording everyday expenses.
A payoff plan. Tackle high-interest debt as one of your first priorities. This usually refers to credit card debt, which can carry an interest rate of 20% or even higher. Credit card companies also enjoy no cap on interest charges.
This debt can grow quickly and become unmanageable if you only make the minimum payment. Generally, if the interest rate on your debt exceeds what you might earn in the market, pay down the debt aggressively before you invest.
Consider only paying the minimum on debt with lower interest rates, though, typically student loans and mortgages. Here it makes sense for you to invest excess income rather than pay down principal, as the interest on the debt is generally lower than your potential returns from the stock market.
Emergency funds. Unexpected expenses can wreak havoc on your financial plan. Perhaps your Monday morning commute results in a fender bender, causing $2,000 in damage to your car. Where’s the money for repairs?
Dipping into investment accounts can generate capital gains and taxable income. Withdrawing from your retirement account can generate ordinary income taxed at a higher rate than capital gains; early withdrawal penalties can also arise if you tap your retirement account before you turn 59½.
Your emergency fund needs to cover three to six months’ non-discretionary expenses such as mortgage or rent, bills and costs for food and transportation. The fund can also help you prepare for life changes. For instance, if you expect a job change or a move, you can build your fund to cover expenses for the time when you potentially lack income.
Saving six months’ worth of cash may seem like a burden. Save a little at a time – and sock away windfalls. Get a tax refund? A job bonus? Treat yourself to a reward but consider saving most of that money for the unexpected.
Proper insurance. Besides your necessary coverage – health, auto and homeowner’s — consider several types of insurance often overlooked:
- Umbrella liability in addition to your auto and homeowner’s policies can help protect against damages if you face a lawsuit and pay for expenses over and above what your other policies cover.
- Disability insurance is particularly important early in your career. Passing time increases the chance that you may become disabled rather than die unexpectedly. Plan for such a potential loss of income if you can’t work.
- Life insurance becomes key if you have children or you provide for a family member, as well as when you are single and carry any debt; life policies can cover your remaining expenses or your family’s if you die.
Many employers offer disability insurance and life insurance as employee benefits.
Living within your means. Naturally you feel pressure to keep pace with your peers, especially when your newsfeed brims with lures for new cars and exotic trips. Tune out everyone else and focus on your own financial situation.
If you want a new car, for example, make sure that a monthly auto payment fits your budget. If it doesn’t, consider a cheaper car or putting down a larger down payment.
(Our next article looks at more money subjects for Gen Y, including investing and credit scores.)
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Cassandra Latsios is an associate consultant with Wipfli Hewins Investment Advisors LLC in Philadelphia.
Hewins Financial Advisors, LLC d/b/a Wipfli Hewins Investment Advisors, LLC (“Hewins”) is an investment advisor registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Hewins is a proud affiliate of Wipfli, LLP. Information pertaining to Hewins’ advisory operations, services, and fees is set forth in Hewins’ current ADV Part 2A, copies of which are available upon request or at www.adviserinfo.sec.gov.
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