Millennials are often thrown on the line for downgrading the economy or being too reckless with their money. However, that is far from the truth. Millennials just entered the market at the worst time in American financial history, excluding the Great Depression. Crushing student debts, recession and high living costs have burdened millennials with too much to worry about. However, it is also a great time to move away from traditional options and millennials are the perfect generation to give it a shot.
If you fall under this category, you are sure to be stuck with the problem of finding the most suitable avenues for saving, spending, investing and building generational wealth. We have just the solution for you:
Should you save, invest, or save?
People in the peak earning years are always advised to spend 50% of their earnings on necessities, a quarter on investing, and the other quarter on miscellaneous and experiences.
But let’s be clear, with sky-high inflation, it is almost impossible to adhere to that principle. Hence you should replace a quarter of discretionary expenses with 15% of your total earnings on eating out and entertainment. And the other 35% should be used to stay one step ahead of inflation with investing. However, no one is saying that you should spend the rest of your earnings on loans, clothing, housing, or food.
If you live in a country where you pay laborious costs of living, then following even the upper financial plan becomes difficult. Hence, you should consider living with parents or relatives initially and build financial rapport slowly as millennials dealing with money.
Be more concerned with paying back your debt
The student loan debts of millennials are crushing and it surpasses any previous generation X and boomers too! You can make this huge burden small by paying the debt quickly. This should be done even when you are cutting down on your discretionary spending because eventually, it saves a lot.
Hence, you are not obliged to follow the 50-25-25 rule for investing,spending saving, and miscellaneous spending if it does not fit your financial conditions. If you have a student loan, it’s better to pay it rather than regret not spending a quarter of your earnings on eating out.
You should get rid of that student debt as soon as you get out of your college, even if that means you are living below your standards, credit card debt, and auto-debit and slowly you will be free of the financial burdens. Hence be empowered to save and invest more in the future as millennials coping with money.
The difference between saving and investing
Now, comes the big question of saving and investing. Social security might not even exist during the retirement of millennials. However, until it is around, millennials will keep paying money for it. At some point, it might go insolvent and dissolve. This is more relevant in case the universal basic income is taken into account in the coming time. Hence, saving and investing should be very high on your list if you are a millennial.
When possible, invest more than you save because the former can counter the effects of inflation. The value in bank savings will also rise but the interest rates on savings accounts are astoundingly low. Since inflation has no end, the money in your bank will gradually lose a lot of value. Inflation may lose its pace, but the value will still go down because the federal government will not stop printing more currency over generations.
Hence, you should increase the value of your money while there is still a chance by investing and staying ahead of inflation surges. You should dedicate the majority of your idle money towards investment. Although having good savings is crucial, you should not consider adding 1/3rd of yours in an interest-bearing account instead of it to stocks, bonds, mutual funds, ETFs, and other investment avenues.
How to diversify investments
Hence at least two-thirds of your ideal money should go to investments. You can also cushion the investing risk by diversifying in various investment instruments like:
- Real Estate
- Mutual Funds
- Money Market Accounts, etc.
Mitigate the investing risk further by considering your risk tolerance and other geographical factors. You should contribute to the Roth IRA or 401(K), each month religiously. There is no point in acting sly and holding money in the account, thinking you will invest when it goes down because the market is unpredictable. You will keep waiting for months or even years if you go with that approach.
Hence, as opposed to timing the market. You should diversify your portfolio by investing in different stocks, and instruments each month from your income. This approach will give you a solid standing in the market and help you lock in profits over the years. Hence, you should add positions regardless of their peak phase, or the trough phase.
Match your employer’s contributions while you have a chance
If your employer allows you to match the 401(k), don’t shy away, and max out on your contributions each month. The more you contribute, the more free money you will get when you retire from work. Hence, keeping your current job is essential, because not many employers let you match the 401(k). Moreover, the reports by Millman show that over 25% are still without a retirement plan from the employer. On the other hand, over 50% of millennials lack an employer-sponsored retirement plan.
Hence, you should cherish the opportunity and max out the retirement and tax-advantages account, and plan for a hassle-free future after retirement. If your company does not have a 401(k) plan, you can open an IRA or an individual retirement account. You will get a low cap as compared to 401(k), but still, invest for your future. Hence, if you keep saving 20% of your salary, your income will be 25x in 40 years.