If you were born between 1981 and 1996, you’re part of the Millennial generation. This cohort is also known as Gen Y because it follows Gen X.
Today’s Millennials face a variety of financial challenges, including student loan debt, the rising cost of rent and homeownership in many cities, and volatile financial markets.
Whether you’re a new graduate still living at home or have already become a homeowner or parent, there are key ways to build healthier finances. Here are 5 tips every Millennial can use to create more financial success.
1. Check your goals.
To have financial success, you need a plan to turn your wants and dreams into realities. No two people want the same things out of life.
Do you want to retire early, start a family, go on a year-long vacation or become a homeowner? You need an action plan that breaks each of your financial goals into bite-size pieces you can achieve over short periods of time.
Let’s say you want to retire in 30 years with at least $1 million. You’ll need to invest about $800 a month with a 7% average annual rate of return. You might break down that goal into saving $200 a week or about $25 per day.
2. Monitor your spending.
After you have clarity about what financial success means to you, and you’ve created goals to achieve it, it’s time to track your expenses closely. Financial programs, such as Quicken and Mint, make creating and sticking to a budget easier.
By the time you’re 30, you may have some bad spending habits that need to be corrected. For instance, how much do you spend on daily trips to the local coffee shop, premium cable channels or luxury items? Looking at a few months of spending can often shine a light on significant sources of potential savings.
3. Use automation to stay disciplined.
Even with goals and a budget in place, staying financially disciplined can be challenging. This is especially true for Millennials struggling under the weight of student loan debt.
Here are some ways to use automation for healthier finances:
• Use direct deposit to save more. You can have a portion of your paycheck, benefits or tax refund sent directly to a bank savings account and build your emergency fund.
• Participate in a workplace retirement plan. Having contributions come out of your paycheck before you receive them is the only way to fund certain accounts, such as a 401k, 403b or 457.
• Set up recurring bank transfers. Most online bank accounts allow you to move money on a schedule. You might use this function to fund other accounts, such as emergency savings, IRA, HSA or 529 college savings plan.
4. Make saving a habit
When you’re just starting out, it can be difficult to start saving and investing on a regular basis. Few people feel they have discretionary or extra money to set aside. But you must create the habit of saving (even small amounts) as early as possible, no matter how much it hurts.
Save a minimum of 10% to 15% of your gross income. If you have a retirement plan at work, such as a 401(k) or 403(b), that’s an extremely valuable benefit you should never pass up. If you don’t have a workplace retirement plan, open up an IRA and make regular contributions to it.
5. Fill your insurance gaps.
In addition to having emergency savings, an important part of taking control of your finances is being adequately insured. Here are some important policies to improve your financial security and happiness.
• Health insurance is a critical protection that everyone should have. But remember it pays a portion of your medical bills — not your everyday living expenses if you get sick or injured and can’t work.
• Disability insurance replaces a portion of your lost income if you’re unable to work due to a covered illness or accident.
“Your ability to earn future income is your greatest asset, says Ashley Shope, assistant vice president, Product and Market Development for Unum. “You should protect it with insurance, just like you do other items of value, such as your car, home and personal belongings. Even if you save 10% of your income every year, it could be wiped out if a disability — such as an accident, illness or pregnancy — prevents you from earning an income for 12 months.”
• Life insurance protects loved ones who would be hurt financially if you died. Matt Purington, assistant vice president, Product and Market Development for Unum says, “Don’t underestimate final expenses your family may incur in the event of your passing. Funeral costs could be in the range of $7,000 to $10,000.”
Purington recommends purchasing life insurance in your 20s or 30s. Having a forward-thinking attitude can pay off by getting more coverage at a lower premium. He says another life benefit is protecting family who may have cosigned your credit accounts, such as auto and student loans. They’d be on the hook for the entire balance if you passed away.
By the time you’re in your 30s, it’s wise to make sure you have enough insurance coverage to protect yourself and those you love from the unexpected.