Long Term Financial Planning for Millennials
For a highly educated generation, Millennials show surprising ineptitude in certain areas of money management. In recent studies, only 8% of those polled had a high level of financial literacy, while about a quarter, or 24%, demonstrated just a basic understanding of how to manage their money. A generation that lacks secure pensions will certainly need to prepare for their twilight years and be financially savvy along the way.
The good news is that Millennials have shown the greatest increase in their savings rate compared with any other generation, according to new data from Fidelity. The typical 20-something is now stashing away 7.5% of income vs. just 5.8% in 2013.
Generation X and Boomers are still saving larger percentages of salary but have not stepped up their contributions by nearly as much.
But for Millennials, there is the added complication of carrying large debt with student loans and other sources of long-term debt. And without the financial knowledge to dig out of their debt hole, this can become a permanent setback.
“Young people who have a college degree today are much more likely than previous generations to start their economic life in debt,” says Annamaria Lusardi, academic director of the Global Financial Literacy Excellence Center at George Washington University. “Universities can do a better job providing students, in particular those with student loans, with financial education.”
Young people saving for retirement do have one big advantage — time. With traditional pensions disappearing and Social Security in trouble, saving now is their safest bet, and young people have a head start in this category.
Compound growth over an extra 10 years may double your nest egg by age 70, which is why some savvy Millennials are outpacing previous generations in building wealth.
Always strive to save at least 10% of pre-tax pay or even more, if you can, and contribute enough to your 401(k) plan to get the full company match. Then add to your contributions with every pay raise. To stay on track and keep things simple, sign up for (or do not opt out of) the auto enrollment and auto escalation of contributions feature in many plans.
By starting to plan for your future now, you will have a head start on the most important savings plan you’ll ever embark on and begin to accumulate wealth from a young age.
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