I am asked quite often how best to train, educate, and inspire Millennials to be successful financially. The burden of Millennial parents is clear: to make sure they can ultimately rest in peace with the knowledge their children will be okay. I understand that because, like them, I have millennial children and feel the same way.
Truth is, there is a difference in how Millennials view and therefore address financial matters relative to the Gen Xers or Baby Boomers who came before them. This is for good reason. Some of that is how they were raised, I suppose, but much of it is due to what they have witnessed and experienced personally as they grew up in the 90s and early 2000s.
For example, these kids (if I may use the term) saw their family suffer from and wrestle with the aftermath of two major recessions, the latter of which was the largest in US history, save for the Great Depression in the 1930s. Within that experience, they suffered the foolish behavior from some of our largest and previously most trusted financial institutions and government agencies.
Later, in their attempt to gain a foothold as adults, they went to college and took on, in many cases, large amounts of student debt, money, which still needs to be returned. Exacerbating this challenge, while looking for entry-level jobs out of college, they have found the best job markets also come with the highest rent and homeownership costs. Until very recently, they have never known a market environment where wage increases were the norm either. In short, the turmoil and struggle they have known to date gives them pause on a number of levels.
With any generation gap, I sometimes look at the things that interest this generation or the way they go about things and scratch my head. It is not necessarily bad behavior, just different from mine. Unfortunately, as with generations before them, the more senior age groups ultimately develop stereotypes, which, while they carry some truth, certainly do not describe an entire group of people with precision.
I don’t mean to artificially generate some sad sack story for us all to feel sorry for this generation – something they wouldn’t want either. However, recognizing their unique, but relatively small sample of financial experiences, recognition of where they may be coming from – at least generally – seems a good place to start as we endeavor to give some advice. Truth is, this unique generation will ultimately end up inheriting a tremendous amount of wealth over the coming decades and is therefore in need of some guideposts from which they can navigate their own way in this world. While we account for their uniqueness, though, we all start by asking ourselves what is most important, right? What do we personally and collectively value? What expectations are we willing to shoulder and which ones should be discarded? What is worth sacrificing for and how much are we willing to sacrifice? Too many of us live under the crushing weight of anxiety brought, in part, by attempting to live under someone else’s vision and directives. To lose that weight and gain a healthy perspective, I would encourage all of us, but especially the Millennial generation, to slow it down a bit and really reflect on what is important to you and build on that foundation.
Thinking through these issues and after experiencing so many of these many conversations about the financial future, I have attempted to distill the following summary of considerations for my millennial brethren as we begin what I hope to be a meaningful and genuinely useful conversation.
1. Getting Organized
There are a number of great tools designed to assist us in organizing our finances and consequently help us understand just how much we spend and how to manage it better. These include but are not limited to mint.com, Quicken, and others. Some of them, like Mint, are free and thus don’t require more outflow as you get started. Using great tools is a good start, but the output of our efforts here are only as good as the inputs.
As a practical matter, I would suggest writing down your goals (short, intermediate, long) as the starting point and foundation of organization. Being able to see these goals on paper will support your efforts to make them a reality. Next, take a look at your inflows and outflows with a focus on your nondiscretionary vs. discretionary spending. Find out where you might need to expand or cut back as necessary. Then, before making your next purchase, ask yourself if it is a need or a want. Are you willing to cut back on your discretionary expenses in order to help you achieve your bigger financial goals? Like with diet and exercise, discipline in this endeavor will be paramount.
Look at this as a challenge and opportunity, taking this as a chance to start prioritizing your goals. Generally, you should be aiming for a 50/20/30 budget in which 50% of your take home pay goes to your non-discretionary spending, 20% goes towards meeting your financial goals, and 30% goes towards your “fun” money that you can enjoy today.
Once organized and the budget is in place, we need to start saving. But where to go first? That is where we go next.
2. Plan Early
This advice is rather universal, but no less potent than it has been in the past. The fact is, the sooner you invest, the more you will have later for retirement, college for your own kids, charitable giving, or any other activity you deem worthy of your hard-earned dollars. Albert Einstein famously stated that “the power of compound interest is the most powerful force in the universe.” Who are any of us to question the great Einstein, right? The truth is the longer your money works for you, the more you will ultimately have. Period.
However, planning early doesn’t just mean investing early in life, it means putting yourself in the position to invest in the first place. Only those with excess income can invest. How to develop that excess begins next.
3. Pay Off Your Credit Cards
A colleague of mine shared a great way to explain the value of a financial advisor. Comparing the FA to a personal trainer, he states the obvious: for those of us who want to lose weight and get in better shape, we know what to do – eat less and exercise more. Not complicated, but anecdotally, not easy to accomplish over the long haul either.
Getting into financial shape, as it were, is no different. Earn more and/or spend less and you will have more wealth over the long term. Again, not complicated, but not easy to accomplish either. In short, to pay off debt, one may need to consciously choose to simplify their lifestyle (read: spend less) for a time in order to truly enjoy an expanded lifestyle later. The other side of that coin is to always be chasing your financial tail as it were. Been there. Done that. Don’t want to go back. Bite the bullet and do what is necessary to reduce and ultimately eliminate those cards – and don’t over use them again.
To do this requires not only the mindset of being frugal, but the means to exercise said frugality. In other words, start by getting your spending and budget organized so you can truly know where you stand financially and then make the necessary adjustments.
4. Build Your Cash Cushion
Oftentimes, our credit card balances started out with legitimate needs for which we simply didn’t have the cash on hand to cover. For me, in my freshman year in college, my transmission went out. As a commuter and with no viable mass transit from my home to campus, I had to have that car up and running. I compared the costs of repair to a new “beater” and found that repair was the best option. Regardless of my choice, though, I only had about $200 in the bank and the repairs were going to be – let’s just say it would have been higher. Alas, the Visa card in my wallet appeared magically to save the day. I got my car back but was now spending much of my meager income on debt service. I was in that credit card hole from which the light of day is rarely seen.
Knowing how easy getting into credit card debt can be, it is best to use any excess income to pay down and the off that debt. With credit card payments behind us, our next step is to build up a cash reserve so that we don’t have to stress any more about the emergencies and setbacks that might come our way.
There is a general rule of thumb, which states one should have three to six months of their base budget in the bank. I think that is a great place to start, but might push that to a range of six months to 12 months. I understand that might take some time to build, but once in place, the stress levels drop precipitously and you are more free to pursue those more important things as a result.
With budget discipline in place, credit card debt in the history books, and some cash on hand to give us peace of mind, we can turn to one of the biggest issues many face in getting off the financial tarmac: student loans.
5. Student Loans – Consolidate and Conquer
When one finally emerges from the gauntlet of getting their undergraduate degree (and graduate if applicable), not only is there a lot of student debt, but there are literally a lot of loans. Each of these can carry differing terms, rates, and the like. First and foremost, I recommend you consolidate them to the lowest number possible. This, of course, mainly applies to private loans, which can have a wide degree of variance between them.
I would not, on the other hand, recommend you comingle private and Federal loans as the latter is subsidized and is more advantageous to retain separately. That said, though, the first step is to shrink the number of loans for both simplicity sake as well as to get the best possible overall rate and terms. One place I could recommend the exercise of consolidating loans would be SoFi, although there are others too.
Next, of course, is to take the excess income we have begun to generate and make larger than the minimum payments. I would also caution you, this may not be a quick fix. Depending on the amount you owe, this very well could be a multi-year project and will require a tremendous amount of patience and discipline. With that in mind, I want to take a step back.
While you apply all of yourself to the retirement of credit card debt, build your cash reserves, and consolidate and meaningfully reduce your college loans, realize this is not a linear process.
You may be building your reserves at the same time you are reducing some debt. Therefore, the remaining considerations I would suggest speak more to principals than to steps of assembly. Allow me to elaborate.
6. Know and Watch Your Credit Score
The system for building and maintaining credit through firms such as Experian can seem rather counterintuitive. For example, you can’t get credit because you don’t have credit history. Well, you don’t have credit history because you can’t get credit. Backwards.
However, as you take some of the actions above, your credit score should improve. Lower debt to income and lower debt to credit available should make your future credit needs (i.e. a mortgage) become easier down the road. While you work diligently to craft the best credit you can, though, you need to constantly been on the lookout for credit agency mistakes and potentially fraudulent activity. This is unfortunate, but true. Services like Credit Karma can be useful tools in this effort. Whether you use them or another service, the point is to keep a close eye on this item. It can make all the difference in the world.
7. Maintain Proper Insurance Coverage
For many of us, health coverage is available through employment. That, however, is not universally true. The point here is to make sure you have some kind of health coverage. In addition, though, don’t overlook your auto insurance, disability insurance, homeowners or renters insurance, and umbrella liability coverage. In addition, if you have others dependent on you financially (if you are a parent, for example), please buy life insurance protection.
I don’t want to repeat the stories of young families I have known and come across in my career who faced the tragedy of an early death without this protection. Like with a cash cushion, you are simply creating the means to keep you going financially through the potential challenges life may throw at us, whether that be a disability, illness, premature death, accident, or other such setback.
8. Invest In What’s Important
By this point, we have laid out a path to financial stability, but not yet to dynamic financial growth and development. To not go backwards, follow steps one through seven. To go boldly forward, though, we take a look in the mirror. Millennials are just starting out in life and the reality is you are the most productive asset you will ever have. Invest in that asset. Whether that be graduate school, obtaining a professional certification, or an exploratory trip around the world, invest in what will make you more productive and, ultimately, the most fulfilled. That very well may be the catalyst creating more excess income for you to grow financially in the future.
9. Expand Your Horizons
As you get to the end of the list, we have established the path to financial stability and have begun to grow through the experiences and challenges we have been able to finance. Now, I encourage you to expand your horizons a bit. That comes in two forms: First, as you invest in a portfolio, realize that the United States is roughly one-third of the world’s GDP. There will always be opportunities outside of the US as well as within it. Keep your diversification as broad as your mind is open to new things. Secondly, and I believe more importantly, be willing to trust.
I recognize the financial services industry has its history of failures. However, it has also quietly navigated so many to financial peace of mind. When I say that, I assume you will challenge, ask penetrating questions, and look very closely at how advisors get paid, what their conflicts of interest are, etc. Nonetheless, be willing to trust someone at some point who might be able to walk this path with you.
As I write this, I am thinking of my kids. I am imagining me saying this directly to them. As such, I am under no illusion that this brief treatment of financial planning has single-handedly solved the many issues and challenges we all face. However, it is a place to start a conversation, not necessarily as parent to child or mentor to mentee, but as equals. I, for one, can’t wait to see where this conversation takes us.
About Michael McGrath: Michael McGrath, MS, CFP®, CLU® is a vice-president with EP Wealth Advisors. Mr. McGrath graduated from Pepperdine University in 1994 and received his Masters of Science in Finance with an emphasis in Financial Planning from The College for Financial Planning. Active in his home community of Santa Clarita, California, McGrath was elected to the Newhall School District Board of Trustees and has served as an adjunct faculty member at The Master’s College in Newhall, Calif. Michael and his wife, Shelley, have been married since 1992 and have five children, Garrett, Brody, Alleah, Collette, and Griffin.
About EP Wealth Advisors
EP Wealth Advisors, LLC is a fee-only registered investment advisory and financial planning firm based in Torrance, Calif., with additional offices in the San Francisco Bay area, West Los Angeles and Irvine, Calif., Seattle and Denver. The firm manages more than $3.29 billion in AUM as of December 31, 2017 and provides client-centric financial planning, wealth management and investment management services to individuals and businesses. EP Wealth is led by co-founders and managing directors Derek Holman, CFP®, AIF®, Brian Parker, CFP® and president and CEO Patrick Goshtigian, CFA®. For more information, please visit www.epwealth.com.