Today, young people are faced with massive student debt and on top of that, the job market is tough and salaries are stagnant. This is an uphill battle especially when planning for the future. When one is unable to find a well-paying job, it means no payments will be made towards settling student loans. By not doing so, your credit score is affected and in turn you will be locked out of financial opportunities like mortgages which are vital to owning a home.
The good news is that there is hope at the end of the tunnel. To overcome many problems present in the world, all one needs to do is plan not only for the present but for the future too. This will help Millennials overcome the challenging economy and have the power to take control of the present in preparation for a brighter future.
So, what steps can young professionals take to manage personal finances for this future?
Follow a budget
One of the most basic steps to follow in financial planning is having a budget. Despite how well-known this step is, it is often underutilized. Building a budget while planning for the future takes more into account than just how much you make and how much you spend. Financial planning with a budget focuses also on maximizing your savings and paying off what you might owe. Many people don’t start budgeting until later in life, but the sooner you start, the more effective it can be. Budgeting does not mean cutting out all of the fun since this should get factored into the budget too! But it does mean having enough saved up for fun later in life as well.
You might also contribute to your budget by generating extra income to contribute towards these savings. There are many side-jobs that don’t require full-time commitment, so you’d be able to work a regular job and earn extra on the side, little by little, which will add up over the years.
Pay off high interest loans
Millennials are regarded as the most educated generation of all time. Today, it’s not hard to find a young man or woman with a couple of diplomas, degrees, and post-graduate education. In another time, well-educated individuals were rare and sought after. Through research and innovation, they came up with new technologies and solved thousands of problems with the purpose of making the future brighter.
Unfortunately, the more degrees you pocket, the higher the student loans you likely have. With stagnant wages and a tough job market, young people may find it difficult to meet their needs and wants. Regardless of the challenges, one thing you cannot compromise is your credit score. Having a good credit score can keep financial opportunities open for you now and in the future. A dent in your credit score can lock you out not only from getting a mortgage but also from renting a home.
To avoid these, you can start by paying off high interest loans, like your credit card debt, among others. This may not be easy at first but if you cut your expenses (especially luxury items), you can settle your debts faster and be on your way to a financially secure future. Think of this: is it a sound decision to pay interest on a pair of jeans, a smartphone, or even a laptop? For such purchases, you can save money and buy them in cash instead of credit.
Have an emergency fund for unexpected issues
You need to save for an emergency fund, ideally while you are young and before you start incurring any additional debt. Planning for unexpected expenses like medical bills will eliminate the chances of burdening yourself financially. The predicament of an illness or job loss can become worse if you don’t have savings to cushion yourself.
As a young man or woman, you can start by saving three to six months of your living expenses in an emergency fund. To do this, you can open a separate bank account which eliminates the urge to dip into your savings. There are employers who offer an emergency savings fund, allowing their employees to enroll in automatic payroll deductions. The separate account will allow you to lead a disciplined life and make you think twice before using the money to fund luxuries.
Start a retirement account
One thing many young people forget to plan for early on is the fact that they will one day retire from work. With retirement, you will no longer report to your workplace and earn your salary and allowances like you used to. Furthermore, your age will likely not let you complete tasks like before. Today, financial advisors are pushing young people more than ever towards retirement planning. This is not only done to ensure that they are financially secure after retirement, but also so that young people can benefit from compound interest earned over the years. Compound interest allows you to save your money in your 20s, 30s, and 40s, and the money will accumulate more and more as interest builds.
There are several options available to Millennials that are worth taking advantage of. These include Roth IRA, traditional IRA, and 401K. Imagine this: if you were to save $5,000 a year in a Roth IRA for the next 30 years with a return of 7%, the value would amount to $555,000 or more. This is a substantial investment, especially for when you retire.
Here is a simple checklist to begin financial security for retirement:
- Take advantage of the compound interest.
- Maximize your contributions to retirement plans like 401K, Roth IRA, and IRA.
- Keep an eye on any high fees charged to your mutual funds and other investments.
- Invest in passively managed mutual funds and ETFs.
- Buy a home as it allows you to build equity.
- Figure out where you want to retire.
Benjamin Franklin, the father of time management, once said “failing to plan is planning to fail.” The quote may sound like music to your ears but it helps to warn about the dangers of not planning for financial security. With the many challenges that Millennials have to face today – like stagnant wages, tough job market, rising costs of products and services – smart financial planning can make things easier.