Recent Pew Research Center results indicate there are 75 million millennials living in the U.S., with the demographic projected to surpass baby boomers in 2015, making it the nation’s largest generation.
Millennials are often described as diverse, educated and tech savvy, with big career goals and an optimistic future outlook. When it comes to finances, however, the generation has been characterized as risk averse, with many young professionals coming of age during the recession. Some even feel they will not be able to purchase a house or retire until much later in life than their parents, despite making six-figure incomes and paying off a good chunk of their loans.
No matter how you refer to this booming generation, its sheer size and age range make it a significant force in the economy—in locally and nationally. With U.S. Bureau of Labor Statistics estimating millennials will comprise more than 40 percent of the U.S. workforce by 2020, it’s important for young professionals understand how to maximize their financial potential.
As someone who works closely with young professionals on a daily basis, I have seen prevalent themes emerge over the years—from planning and budgeting approaches, to saving and investing. Below are my recommendations for building a successful financial future:
Create a Plan
Similar to other pieces of one’s life, planning is critical for financial success. The financial action outline doesn’t need to be complicated, but a plan provides a starting point and creates a baseline for measuring goals. It may be easiest for the demographic who relies heavily on connected devices to make use of technology, and incorporate relevant programs and apps into the process. For instance, sites such as Mint.com help users understand the complete picture. You can start with the site, document goals, time horizon, investment objectives and—most importantly—create a strategy and an action plan.
The plan can also serve as a basis for creating an individual or family budget. If unsure where to start, consult a financial professional. There are a number of fee-only financial planners who will work with young professionals on an hourly basis .
With time on your side, I recommend starting investing early on to maximize the returns. It’s best to keep investments simple and costs low, as a start. For instance, consider utilizing low-cost, broad-based index funds in the portfolio to diversify and reduce investment expenses, and mitigate tax consequences. Reducing costs is often an overlooked method of increasing long term returns in a portfolio.
A great way to streamline the process is automating an investment program. The amount doesn’t have to be significant from the get-go. You can start with a small amount until you get more comfortable with the process and increase it as the budget allows.
Plan for Retirement
It’s never too early to create a retirement plan. Retirement accounts provide tax-deferred growth, a powerful feature to help boost long-term returns and income decades from now when one stops working. If a company offers a 401(k) plan, the employee should check if the employer matches a portion of their contributions. At the very least, one should contribute enough to receive the full company match (often around 5 percent of annual pay, though percentages vary).
A great way to give the retirement account a boost is with company bonuses. For example, if one could live off bonus for a month, he or she may defer their full month of regular pay into the 401(k) or retirement account. With the limit on employee contributions up to $18,000 in 2015, there’s even a greater chance to maximize those contributions.
Reduce or Eliminate Fees
Creating a financial plan includes physically reviewing all the incoming revenues and outgoing expenses. In doing so, one may notice a number of fees tacked onto bills, loans and other expenses that may otherwise be overlooked. Every fee means less money in your pocket. Banks are often changing their rules and one may be surprised to learn they are paying a fee for something they previously received for free. Challenge yourself to see how many fees you can reduce or remove in the year and consider re-investing the dollars saved into a savings or retirement account.