By Brittany N. Cox, Associate Advisor at Nestlerode & Loy, Inc.
I recently read an article on CNBC.com about how millennials spend their money. I was expecting it to talk about how millennials spend their money on tons of things they don’t need and are totally irresponsible when it comes to their money.
However, I was pleasantly surprised to read that even though millennials are more likely to purchase the $4 coffee and use an Uber instead of walking, they actually are more likely than their predecessors to have a plan in place when it comes to their finances. Charles Schwab reports that approximately 34 percent of millennials say they have a written financial plan while only 21 percent of Gen X and 18 percent of baby boomers can say the same.
Now for another point that surprised me: “Nearly 3 quarters of millennials developed their written financial plans with professional help and 91% of them review or update their plans at least annually.”
Millennials are a group who are mostly burdened with high student loan debt and who suffer hardships in finding a job or boosting salaries since the recession. This has driven goal-oriented millennials, who seem to be yearning for financial freedom, to plan ahead and have a solid road map toward their goals. It is important to note that the spending habits of millennials do have the potential to detour their roadmaps.
In a time when most Americans are living paycheck-to-paycheck, it is crucial to have a financial plan in place no matter what generation you fall into. More than half of Americans have incomes that fluctuate each month making it hard to budget. Young and low-income individuals are among the majority of Americans living with this volatility. Millennials are known for changing jobs more frequently than generations preceding them. This also adds to income volatility for them and also the need for a more solid budget and financial plan.
While it is encouraged to have enough funds in savings to cover at minimum three months of expenses, it is incredibly hard for the majority of Americans who experience income volatility to stash away extra income. According to CNBC.com, the majority of Americans have less than $1,000 in savings and half of all workers in the U.S. have no savings set aside for retirement. The deficit in savings accounts does not vary as much as you would expect based on generations. From young millennials to seniors age 65 and up, the percentage of individuals with nothing saved is between 31 and 37 percent.
In order to set aside funds for the unexpected or for retirement, you may capitalize on what JP Morgan calls “key, predictable savings opportunities” which include December to March pay increases, months with five Fridays (for workers who are paid weekly or bi-weekly), and tax season when individuals receive income tax refunds. Making use of these “un-budgeted” funds for rainy day savings or retirement savings could make a long-term, quite noticeable, difference in your account balance and growth.
A key point for anyone beginning to budget and create a financial plan is to recognize the importance of saving early. It seems easier to put off saving until you have more income or when the student loan debt is gone, but saving early can trump the interest payments on student loans and waiting for more income.
If when you are 25 you start putting $200 per month into a retirement account with an estimated 6 percent return you will have contributed $96,000 at age 65. The account balance at age 65 will likely average $400,000. However, if you wait until you are 35 with the possibility of more income or less debt, and stash away that same $200 with an estimated 6 percent return, you will have contributed $72,000. This doesn’t seem like that much of a difference, right? Wrong. The balance in your account will only average about $200,000. That is half as much than if you had started at 25 thanks to our friend compounding interest. That extra 10 years of contributions totaling $24,000 made a very large difference in the end.
If you find yourself in need of a financial roadmap toward goals such as retirement, or if you are just trying to create a budget to keep yourself on track when your income can fluctuate each month, remember the importance of saving early and make compound interest your friend. If you have already surpassed the age of 25, it’s still not too late. Starting now is better than starting any time in the future.
