Millennials- When I say financial planning you say...........

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.