Millennials- When I say financial planning you say...........
For many Millennials, the concept of financial planning is
an intimidating discussion. According to
a survey by Charles Schwab 44% of young adults have received little to no
guidance from their parents on the topic.
In reality, creating a financial plan, and being comfortable understanding
and executing it, is one of the most important things young adults can do. So, how do you get started?
Did he just use the “B”
word?
Know what you want! Know how to get there! Just like anything else you may take on in
life, you need a plan. One of the ways
to make something less intimidating is by learning more about it. The rule applies to your finances, and the
place to start is with your own personal budget.
The word budget, or the “B” word, has been known to strike
fear into the hearts of many both young and old. Don’t think of a budget as something negative. Instead, think of budgeting as a roadmap, and
this roadmap leads you to your financial future.
Creating a budget should be easy, and dare I say ……FUN! There are a lot of tools than can help you
get started. Free online tools like Mint,
PearBudget, Level Money and GnuCash can help you create and stick to a
budget. If you are looking for something
a little more robust, you may look at purchasing a copy of Quicken or Microsoft
Money.
Build up an emergency fund.
Life happens, but when you’re prepared you can face life’s
challenges with style. As you are
creating your budget, make sure that you plan to create an emergency fund. Not only is having an emergency fund
important, but once you have one you will feel much more financially confident. The easiest way to start creating an
emergency fund is by opening a separate, easily accessible, interest bearing,
checking or savings account, and having regular contributions automatically
transfer to that account. You may be
able to have this done through your payroll department or you may need to set
up an automatic transfer through your bank.
The importance here is automation.
If you don’t have to think about it, there is a higher likelihood it
will happen.
Depending on the stability of your income, and other
financial obligations, the typical recommendation for an emergency fund is
somewhere between 6 – 12 months of your take-home pay.
Am I too young to save for retirement?
The short answer is NO!
It is never too early to start saving for retirement. If you were to start investing $2,500 per
year ($48 per week!) at the age of 25 and continued to contribute annually
until retirement (65), assuming your investments had a 9.5% annual rate of
return (below the stock market average), you would have over $1 million saved by
the age of 65. Put simply, the earlier you start saving, the more you will have
in your golden years.
Unfortunately, According to a recent survey from Scottrade,
more than half (55%) of Millennials have not yet started to save for
retirement. Worse yet, 64% percent of millennials
have not even begun to think about retirement.
There are many different ways to start saving for
retirement. If your company sponsors a
401(k) program, this is probably the easiest way to start. At very least, you should contribute up to
the amount that will allow you to take full advantage of your employer’s
matching. In essence this is “free”
money and you don’t want to leave that on the table. If your employer does not offer a 401(k) plan
or you are self-employed, you can also look into an individual plan such as a
ROTH IRA, SEP IRA, Simple IRA or individual 401(k).
Credit Cards
There can be many advantages to using credit cards. Beyond being an easy to way to pay for things
while you are out and about, you can also earn point or cash back depending on
the card. Having said that, cash back
and points are only a good deal if you are paying off the balance at the end of
each month. If you are carrying a
balance, you should include in your budget a plan to pay off your debts as
quickly as possible. A good method to
use for this is to start with your smallest balance (don’t be too concerned
with interest rates). Once you have your
smallest balance paid off, this will free up more cash to tackle the next
debt. Continue on this process until you
are debt free.
Insurance
The last, part of your financial plan is protecting yourself
and your finances with adequate insurance.
Insurance is an important financial instrument. It is a way to mitigate or transfer risk when
it comes to certain areas, but keep in mind it not wise to be ether over or
under insured.
Health insurance is a good example of an important insurance
too have. Just because you are young
doesn’t mean that you won’t have an accident or meet up with an unexpected
illness. Regardless of your age, you
should make sure that you have protected yourself with adequate health
coverage
In summary...
Although financial planning may not be something you
discussed with your parents, were taught in high school, or even something you
see your friends doing, it is the key to your long term success. Your road trip to financial success needs to
begin with a map. Start creating your
first budget today and don’t forget to include the importance of an emergency
fund, retirement savings, eliminating debt, and protecting your assets through
proper insurance.
