The way we manage our finances tends to vary between generations, owing to different living costs, housing prices, and average salaries. However, millennials (born between 1981 and 1996) have perhaps the steepest learning curve.
With technological advancement coming in huge leaps and bounds, crushing global crises, and a shift in social attitudes towards spending and wealth, there is a lot to take on board – and relying on your parent’s budgeting lessons might not be enough.
Today we look at the financial gaps in millennial knowledge alongside advice to help you safeguard your future finances.
Why Are Millennials Messing Up Their Finances?
Let’s start by talking about housing because it’s one of the core reasons that one in four millennials don’t have any pension plans – and possibly why 52% are more focused on sorting out debt than saving, according to Profile Pensions.
In 1980, you could buy a home and comfortably afford a mortgage on an average salary.
That meant people generally had more expendable income and could afford things like stashing away a little towards their pensions.
Since then, house prices have shot up by a staggering 1010%, a growth rate 24 times faster than average wages.
You can check out these statistics and other living costs on this report from Property Industry to see why it’s put such a critical strain on younger adults.
Living costs take up a substantially larger proportion of every paycheck. A lack of financial literacy has created a generation with little capacity to deal with anything but the here and now.
How Can Financial Planning Help Millennials With Heavy Debts?
We often think of financial planning as a resource reserved only for those with considerable wealth – but it is just as useful for millennials with debts as for an investor with a million-dollar slush fund.
It also makes sense to address this lack of financial preparedness now because the oldest of Gen Z are already young adults and would benefit massively from a culture that champions responsible financial behaviors.
You’ll find more advice in this post paraphrased from this Wonga guide, working through tips for 20-somethings looking to get onto a stable financial footing. For now, though, we need to broaden access and interest in financial planning so that younger generations understand things like:
- Inflation and how economic growth impacts the cost of everyday goods.
- Basic personal finances – filing tax returns, creating a savings account, and making informed borrowing decisions.
- How to compare different lines of credit in terms of cost, safety, and suitability.
A generation that spends at will has no future savings, and barely scrapes by with soaring housing costs could make a major dent in public finances if millions of millennials rely on state pensions and social support to fund their retirement.
The Financial Planning Tips Every Millennial Needs to Know
Ok, so let’s share some wisdom and pointers to help you kick-start a new, accountable attitude towards your finances that will create a platform for gradual, sustainable improvement.
Understand How Much You Spend
Our first tip seems obvious – but monthly budgets and tracking spending are extremely rare and something most millennials ignore.
Everybody needs to begin somewhere, so getting to grips with your monthly income, how much you spend on average, and where will help you pin down unnecessary outgoings that you can afford to cut back on.
Whilst you’re there, think about:
- Immediate financial priorities – paying rent, grocery shopping, and essential costs.
- Medium-term plans – buying a car, saving for a holiday, or repaying debts.
- Long-term plans – purchasing a property, investing in your retirement, perhaps starting a family.
You don’t need to start working towards those goals immediately, but you will often make smarter spending choices when you have a tangible list of what you’d like to achieve with your income.
Start Small – But Start Saving
Savings are invaluable if you find yourself in a tight spot or experience a sudden drop in income.
Suppose you don’t encounter a crisis that eats into your savings.
In that case, you can leverage your contingency budget to make investments, cover large purchases and get closer to those targets you’ve set yourself.
Most experts advocate a 50/30/20 split – 50% of your income is used for everyday expenses, 30% for personal costs such as clothes, and 20% for savings.
Of course, that may not be realistic, and you might want to focus on paying back unsecured debts before you open a savings account, but the sooner you get started, the faster your pot will grow.
Each time you get paid, small contributions deposited into a savings account will earn interest, so there isn’t ever a bad time to start.
Protect Yourself From Risk
Insurance is a boring topic that most millennials may not consider relevant – but protection against the unknown is a lifeline when things don’t go to plan.
Expensive policies might not be viable, but think about:
- Buildings and contents cover – can you afford to replace the laptop you rely on for work if it is stolen?
- Critical illness insurance – who will pay your rent or mortgage if you need to stay in hospital and cannot work?
- Liability cover – if you are self-employed, could your business survive if you find yourself the subject of a legal liability claim?
- Life insurance – what happens if you pass away? Will your kids or partner have the financial means to cope with your debts without your income?
Health and life insurance are perhaps the most crucial (aside from buildings cover as a mandatory requirement for a mortgage).
Pick a policy you can afford without huge excesses, and you’ll be investing in a comfort blanket that might be very worthwhile.
Invest for the Long-Term
Like savings, investments aren’t normally a viable prospect if you have short-term debt, but once you have a small savings pot, you can look to make that cash work a little harder.
The important thing is to weigh up the risk vs the potential return.
For example, buying a fast-growing cryptocurrency might be attractive, but you could lose everything very quickly if the value drops.
Investing in a pension is a great option, as is an ISA with some great tax advantages, or you could go for low-risk shares or bonds with a fixed return.
Diversification is strongly advisable – that means you pick investment products or funds across different markets or sectors. If one crashes, you won’t be in a difficult position where every investment falls in value simultaneously.
Think About Retirement – However Far Away it Seems
Finally, retirement planning should always be a part of your decision-making, even if you don’t expect to retire for several decades!
There are few worse prospects than working hard for a lifetime and then struggling to cope with the basics during retirement due to lack of preparation.
Whether you go for low-risk investments to steadily grow your wealth, open a pension fund to make savings, or put together a debt repayment plan to free yourself from crippling interest, being proactive now could make a big difference in the years to come.