Navigating financial planning as a millennial comes with a unique set of challenges, from grappling with student loan debt to weathering the effects of multiple economic downturns in their lifetime. Born between 1981 and 1996 (aged 28 to 43), the millennial generation has inherited an economic landscape marked by uncertainty, slow or stagnant wage growth, and rising costs of living. Many of them began working during times of dramatic change, such as the 2008 Great Recession and the COVID-19 pandemic.
As a result, they have struggled to accumulate wealth as quickly as previous generations. A key aspect of personal finance for millennials is having a solid plan in place to not just catch up but also reach long-term goals such as buying a home or saving enough for retirement.
What is financial planning?
The goal of personal financial planning is to create a roadmap for your money. At its core, financial planning for millennials should involve assessing the current situation, setting achievable goals, and then coming up with a plan to make them happen. This process often includes budgeting, saving, investing, managing debt, and preparing for unexpected expenses.
By proactively managing their finances and implementing sound financial planning principles, millennials can navigate economic challenges, build wealth over time, and work towards securing their financial future.
Why is financial planning important for millennials?
Financial planning is important for everyone, but it’s especially crucial for millennials to stay on track. Many millennials began their careers in the aftermath of the Great Recession of 2008, which shaped their financial trajectories and often forced them into lower-paying jobs or fields unrelated to their aspirations.
Fast forward to the present, and this generation has witnessed further upheavals, from the seismic impact of the COVID-19 pandemic to waves of layoffs and economic volatility. Combined with inflation, lack of affordable housing and rising levels of debt, millennials are facing more hurdles to achieving financial well-being than perhaps any other generation.
Financial challenges millennials face
Over their lifetime the millennial generation has faced financial challenges in ways previous generations did not. Student loan debt, lagging salaries and higher rates of interest and inflation have taken a toll on both their incomes and their savings accounts.
In the 2021 Millennials Readiness for Retirement study, conducted by the Center for Retirement Research, millennials aged 28 to 38 were found to have a lower net wealth-to-income ratio compared to previous generations. According to a 2023 study by the Transamerica Center for Retirement Studies, the average millennial savings include only $49,000 in total household retirement accounts and $3,500 in emergency savings. Almost one in four have made premature withdrawals from their retirement savings accounts.
Budgeting against inflation and rising cost of living
Budgeting for millennials has become increasingly difficult as they must navigate the effects of inflation. A recently published Investopedia article highlighted that this generation has both significant levels of confidence and concern when it comes to financial planning. It revealed that 63% of millennials surveyed for the article believed that they were better informed on financial matters than others in their peer group. However, it also reported that three out of four millennials were somewhat concerned about managing their finances, with savings, retirement planning and debt management as the main issues. On the issue of debt management, average credit card interest rates increased from 12.9% in 2013 to 22.8% in 2023, according to the Consumer Financial Protection Bureau, which also noted an uptick in credit card delinquencies among millennials aged 30-39 at just under 9%.
Managing student loan debt
Managing student loan debt continues to be a significant challenge for many millennials. According to the 2021 Millennials Readiness for Retirement study by the Center for Retirement Research, 40% of millennial households between the ages of 28 and 38 had student loan debt that amounted to more than 40% of their income. In 2023, millennials carried an average balance of $32,800 per borrower. It takes the average student borrower up to 20 years to pay off their loans.
Buying a house amid rising costs & interest rates
While the housing affordability crisis has impacted individuals across the board, rising real estate prices and interest rates have made it especially challenging for millennial first-time home buyers. Homeownership rates for millennials are significantly lower than for previous generations at the same age, according to the Census Bureau’s Current Population Survey. Only 51.5% of millennials owned their home in 2022, compared to 56.5% for baby boomers in 1990 and 58.2% for Gen X in 2006.
Prioritizing retirement savings
Based on the factors above, prioritizing retirement saving is a challenge for millennials. About 68% of millennials who funded their education with a student loan say they’ve delayed other financial decisions while they pay it off; 26% say they have neglected to save for their retirement as a result.
Financial planning steps for millennials
While goals and financial plans may vary from one person to another, financial advice for millennials typically involves a combination of strategic budgeting, goal setting, paying off debt and increasing savings. Following these steps can help millennials improve their financial health more quickly.
Outline your goals
Setting smart and realistic financial goals is important to stay focused on what you want to achieve with your money. These goals reflect various life stages and priorities, from starting a family to securing long-term financial stability:
- saving for a home
- planning a wedding
- taking a dream vacation
- buying a vehicle
- preparing for a new baby
- building retirement savings
- establishing an emergency fund
Create a budget
Consider using online budgeting tools to manage your income, track and prioritize your expenses, and ensure you allocate your money wisely while also saving for the future. Here are some steps to help you with creating a household budget:
- Calculate your essential expenses, such as rent, utilities, groceries, transportation, and debt payments.
- Put aside a contribution to your emergency savings account.
- Add up your non-essential purchases, such as subscriptions, dining out and entertainment. Determine where you can save or cut back.
- Put your income towards your essential expenses and savings first, ensuring you stay within your budgeted amounts for each category.
- Monitor your spending throughout the month and make adjustments as needed to stay on track.
Build an emergency fund
Creating an emergency fund can help you pay off an unexpected expense like a car repair, medical bill or sudden job loss, without having to take out expensive loans or withdraw from your savings. Set aside small manageable amounts, every week, in a separate savings account. Aim to have three to six months’ worth of your living expenses in this account.
Start saving for retirement
Planning for retirement is crucial to ensure financial security and stability during your later years when you may not be working. Without proper planning to determine how much money you need to retire, you risk outliving your savings or having to rely solely on government benefits, which may not be sufficient to maintain your desired lifestyle.
Common ways to save for retirement include employer-sponsored retirement plans like 401(k) plans, where contributions are deducted directly from your paycheck and may be matched by your employer. Roth Individual Retirement Accounts (IRAs) and traditional IRAs are another popular option, offering tax advantages and a wide range of investment choices.
Make a plan to pay down debt
Paying down debt frees up your finances, reduces stress, and helps you achieve long-term goals more quickly. To compare interest rates on debt, look at the Annual Percentage Rate (APR) for each loan or credit card: this is the true cost of borrowing, including interest and fees. The higher the APR, the more you'll pay in interest over time, which is why you should prioritize paying off high-interest debt first.
When it comes to managing student loan debt, there are several strategies you can consider. One option is student loan forbearance, which allows you to temporarily stop making payments on your student loans or reduce your monthly payments for a set period of time. While this can provide temporary relief if you're facing financial hardship, interest will continue to accrue, which means you'll end up paying more in the long run. Forbearance should only be used as a last resort and should be carefully considered before applying. Other strategies for managing student loan debt include deferment, loan consolidation, and refinancing.
Consider investing
While saving for retirement is crucial, investing and diversifying your portfolio can help grow your money faster. Common strategies for investing include using stocks, bonds, mutual funds, exchange-traded funds, buying real estate, or starting a small business. However, if you’re wondering whether you should pay off debt or invest, compare the interest rates you’re paying to the potential returns on your investments. If the interest rate on your debt is higher, you may want to pay it down first.
Protect your loved ones
Life insurance provides a financial safety net for your family and loved ones, ensuring they can cover expenses like funeral costs, outstanding debts, mortgage payments, and living expenses if you were to pass away. Buying life insurance when you are young has several benefits:
Lower premiums — Life insurance premiums are typically lower when you are younger and healthier, so purchasing a policy early can save you money in the long run.
Lock in insurability — Buying life insurance early can ensure coverage regardless of future health issues.
Financial security for dependents — If you have dependents, such as a spouse, children, or aging parents, life insurance can provide them with financial security and peace of mind.
Supplemental income replacement — Life insurance can serve as a supplemental income replacement for your family, helping them maintain their standard of living if you were to pass away prematurely. Pay off debts — Life insurance proceeds can be used to pay off outstanding debts and relieve your loved ones of financial burdens.
Leave a legacy — Life insurance can also be used to leave a financial legacy for your loved ones or to support charitable causes that are important to you.
Get a term life insurance quote at Protective today.
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