While Millennials have proven themselves an increasingly budget conscious group, e.g., employing smart phone apps to ensure they get the best prices for their purchases, they have also shown themselves to have poor financial literacy.
This generation is heavily laden with debt, with young adults holding an average debt load of $45,000.
So, having a strong understanding of money management may be more important than ever.
The U.S. Treasury Department and Department of Education recently assessed Millennials’ level of financial literacy, and they scored a D+. Fortunately for Millennials, there are a multitude of resources available to help them become educated. However, recent surveys conducted by Fidelity Investments and TIAA-CREF indicate Millennials turn primarily to their parents for advice. The TIAA-CREF survey found that 47% of its 1,000 participants identified their parents as having a major influence in financial counseling. While parental input can be useful, it’s not always sufficient.
Financial education starts as early as pre-kindergarten and is best implemented by parents and schools. Studies show that children who learn money management skills at a young age enjoy long-term benefits throughout adulthood. A 2011 survey by the Council for Economic Education showed that students who studied personal finance in school were more likely to avoid accruing credit card debt, to be less likely to become compulsive shoppers and more likely to save money.
Young adults with poor financial literacy and money management skills can have a negative effect on society as a whole.
Individuals with too much debt, whether credit or student loans, can be prevented from making major life changes such as buying a home, getting married or having children. Additionally, job seekers with too much credit card debt may be precluded from obtaining certain types of employment. There are also psychological and emotional implications, which affect physical health.
There are many resources available to Millennials either to start their financial education or to enhance what they already know. The key is to know where to start and whom to trust. Young people would do well to reach out to a broad set of resources including 401(k) administrators, employers, and financial planning firms that understand the diverse needs of Millennials. (We designed much of the content of our website with this in mind.)
Here is an example on how to save to meet your goal for retirement:
- Start with your employer plan, 401(k), 403(b) or if you are self-employed, SEP-IRA. The contributions you make to a 401(k) or 403(b) are made from payroll deductions, so you never get a chance to spend this money. The deductions reduce your taxable income now, so the government is effectively helping you to save. Also, the amounts invested grow “tax sheltered,” meaning that you pay no tax on any interest, dividends and capital gains. However, when you retire and withdraw from the plan, you are taxed on that amount as regular income.
- If you still need to set more aside to retire, use a Roth IRA next. Set up an auto debit from your checking to fund your Roth IRA, so contributing works like payroll deductions. The amount contributed to a Roth IRA is not deductible, but amounts withdrawn at retirement are not subject to income tax. The amounts invested grow tax sheltered.
- Finally, after maxing out the 401(k) and Roth IRA contributions, if you still need to save more, set up a “taxable account,” meaning an account with no tax sheltering benefit. You can use auto-debit to add to this account.
- Note that, for the Roth IRA, you must qualify and have earned income from which to make contributions to the account. Also note that, for any of these tax sheltered plans, withdrawing funds before age 59½ may subject you to a 10% penalty in addition to income taxes, so do not fund any plan when you expect to need withdraw the money before retirement. Finally, be sure to set up beneficiary designations matching your estate plan, e.g. to a partner then children as contingent beneficiaries (see Estate planning overview update – key issues to consider for your wills & more here.
- If any savings you set aside are intended for college, then use a 529 plan – it grows tax sheltered like a Roth IRA and withdrawals are not taxed as income if used for education only.
If you want to learn more, here is a useful list of resources. We also invite you to check out our website.
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