Challenges for Millennials: significant student loan debt, challenging job markets, frequent job changes, distrust of investing money in the stock market, elimination of pensions as their parents had, fewer traditional employer-sponsored retirement plans, and concern that social security will not be there when needed.
The good news – you have one huge advantage over the rest of us: time. If you make good use of that you will likely do fine. Here’s a plan to support that claim.
Step 1 – Don’t even think about investing any money in the stock market or anywhere else until you have successfully met these prerequisites.
Invest in yourself first – your “human capital”. If you need to improve your job skills by taking a course, set aside money to allow for that. You have complete control over investing in yourself, and you will never have that level of control over investing or anywhere else. You can also make extra money apart from a regular job by developing a second or related set of skills.
Establish an emergency fund for yourself. Think about what your biggest exposure is and set aside money to cover it. Examples include an unanticipated car repair bill or vet bill.
Understand the difference between good debt and bad debt. Good debt is money owed on an asset that is likely to appreciate such as a house bought at a fair price. Bad debt is money owed on credit cards or money owed on assets that depreciate such as a car.
Pay off credit card debt and make a solemn vow never to charge anything that you are not able to pay off in full the following month.
Start developing a sense of what economists refer to as “opportunity cost”. Simply put, if you have a choice between putting money towards option A or option B, choosing one means you lose the benefits (or sometimes the costs) of doing the other. If you decide to try to pay off student loans earlier than the terms your loans require, you do not have that same money to invest, to save towards retirement, or to do anything else you could have done with it.
These decisions can be complicated and may have considerable ramifications years later; if you think you need help then consider meeting with a financial adviser How to Choose and Work With a Financial Adviser.
Be clear on your income and outgo. If you’re not sure you need a budget, read Should You Have a Budget?.
Do your own taxes. Not only will you have control over the data in your returns, you will learn about the US tax system in the process. And you might pay less taxes the more you learn.
Step 2 – You’ve gotten past step 1 and now wonder what to do next.
Take 10 minutes and define your long term goals in general terms: be debt-free, start your own business, hold satisfying jobs, do some traveling, buy a house, get married and eventually start a family, be able to retire at a reasonable age. Your goals are probably not significantly different than your parents’ were at your age, but how you get there is likely to be different.
Take 10 more minutes and do an honest assessment of your personal strengths and weaknesses. And then distinguish between what you can change, what you think you cannot change, and what you don’t want to change.
Accept the idea that living on a percentage of your income is likely to be the single smartest thing you can ever do for achieving financial stability over a lifetime. Start with a small percentage – say saving 5% and living on 95% – and ratchet that upwards as you are able.
Make it a way of life; over the years the compounding effect is significant. Think about it as paying yourself first – your best and wisest investment.
Work smarter, not harder. Use your research skills and familiarity with electronic media to look for apps help you like Mint, Clarity Money, Digit, Stash, Tip’d Off, Wealthfront, FutureAdvisor, SigFig, Learnvest.
Go to Annual Credit Report and pull your free credit reports. Make sure they are accurate. Also look for sites such as Credit Karma where you can get your credit score. You want one above 700.
Familiarize yourself with Bankrate. You will find a wide variety of useful information and applications there including where you can get better deals on checking and savings accounts than you are probably getting now. For those who want to start with very low risk investments, you can use this site to look for institutions offering CDs and shop for rates.
Look for free money. The first place to look is a company match if you are fortunate enough to work for a company that matches a percentage of your contributions to its 401(k) plan. If you work for a company that offers a 401(k) and you haven’t signed up, read Should you participate in a 401(k) plan?.
Step 3 – Now decide what to do with your “extra” money.
Do a brutally honest self-evaluation as to your knowledge, willingness, availability of time, and emotional skills to manage your own investments. Don’t underestimate your ability to learn, and don’t ever think you’re smarter than everyone else. Read I’ve Got Money to Invest – Should I?.
Consider some tools to build an investment portfolio by searching “building an investment portfolio”.
Moving up the expense scale, consider robo-advisors. Here is a partial list of them: Student Loan Hero.
Step 4 – Don’t be in a rush to buy a house.
Create a separate savings account for a house fund if your goal is to eventually buy one.
Monitor your credit score. Your minimum goal should be at least 700 (average score nationwide for April, 2022 is 716).
Don’t start the process by looking at houses and then trying to figure out how you can meet the monthly payments. Start with what is an affordable monthly payment, and then look at the houses that are in the price range for that monthly payment.
You’ll likely be tempted to use some of your retirement savings either through borrowing from a 401(k) if your employer allows it, or simply withdrawing the money altogether. Don’t do it. Seriously.
Step 5 – Consider hiring a fee-only financial planner or investment manager when you:
Do not have the time, interest, or emotional detachment to make some financial decisions.
Need someone to help clarify your lifetime goals.
Want a single point of contact for financial advice.
Need a second opinion on an upcoming important financial decision.
Need someone to explain complex financial jargon in clear and understandable terms.
Need someone to clearly explain analyses such as paying off student loans versus investing the money.
Are making investment choices when you may be unaware of the behavioral issues influencing them.
Need someone on occasion to review your progress and to keep you on track for achieving your goals.
Want someone who is legally obligated to give you advice in your best interests.
Want someone who is always available and who can give you occasional advice at no cost on simple issues.
Step 5 – How do you find a professional adviser who is trustworthy?
Think about what you want help with, and read How to Choose and Work With a Financial Adviser.
Look for a fiduciary What’s a Fiduciary and Why Should I Care?.
Ask friends and relatives for referrals. But don’t choose on that basis alone as a recommendation might not be right for you for many different reasons including the fact that advisers may be good in some areas of financial planning and investment management and less good in others.
Do a search on The National Association of Personal Financial Advisers.
Be willing to interview more than one, and don’t be shy about asking questions!
Don’t be dismayed or overwhelmed by all of the above. The important thing is you start somewhere and build on it over time. Good luck!