When it comes to financial literacy, millennials may be missing the mark. According to a 2014 FINRA study, 82 percent of young millennials have lower levels of financial literacy, and less than half of respondents reported saving for retirement.
April marks Financial Literacy Month and we are reviewing common themes that all millennials likely face. While money issues may be daunting for this generation, it’s important to become comfortable and confident with financial topics so millennials can secure their financial future.
Recent studies have found that the average student loan debt is reaching $30,000. How can millennials – who have just left college and are entering the workforce – begin to budget and pay down debt properly?
For those coming out of school with a significant other or spouse, it’s important to communicate regarding finances and current debt. Identify loans and balances, discuss monthly obligations, and work together to create a plan. Communication is key for those with a partner.
The next important step is to get organized. The average student graduates with five or six different types of loans. Cumulatively, these loans may total $30,000 altogether, but it’s important to understand that each loan has different repayment obligations, terms, and interest rates. Understand each loan and create a file folder that highlights the balance, loan number, and lender information. We then recommend setting up automatic monthly payments to reduce debt load and interest as quickly as possible.
Consolidating loan payments into one loan term is another option to consider. If there are any savings after the consolidation (since the interest rate may be lower than what you originally were paying with multiple loans) direct the extra money into your 401(k) account or bolster emergency funds.
How can millennials take advantage of their 401(k) retirement contributions?
The most important element in saving for retirement – and one that we cannot stress enough—is to start early. At a minimum, millennials should make sure they contribute enough to take advantage of any company match program. We recommend that you establish a budget and understand how much you can save, and increase your deferral rate based on budgeting means.
It’s also meaningful to note that with improved ERISA requirements and guidelines, plan sponsors and employer benefit groups are now able to provide much more help and guidance than ever before. As long as millennials know that they can ask for it, and are proactive, they can have greater services at their disposal to help with asset allocation, deferral rate questions, general education, etc.
What are some commonly overlooked financial items that millennials should keep in mind?
Use debt wisely. Understand the difference between “bad debt” (discretionary spending, credit card debt) and good uses of debt such as mortgages and reasonable auto loans.
Another element that can be overlooked is healthcare. Make sure you have addressed healthcare options and have a well thought out plan to provide healthcare for yourself, whether it is through your employer plan or a public option. Heaven forbid you are not covered, and find yourself in an accident, you will take on a huge debt burden with medical bills that could have otherwise been avoided with the right plan.
The bottom line for young people managing their finances – start early and make smart decisions. You’ll never regret setting yourself up for financial success. If you are a millennial and have other questions related to finance, tweet us @FortPittCapital and we can take a look at reader issues in an upcoming blog post.