6 Financial Planning Tips for Gen X and Y
Retirement can't be financed, which is why saving for your golden years is imperative. For Generation Xers and Yers, paying down student loan debt is way more important than worrying about a retirement decades away. But it can't be ignored. That doesn't mean that you're putting 80% of your wages in a 401(K) plan and living off of ramen noodles, but it does mean starting to plan today.
The rewards for doing so can be plentiful thanks to the power of compounding. It happens when the value of your investments increases because of interest and capital gains. The longer you're invested, the more it will grow. Take a $500 investment in the stock market. If it gained 10% a year, it would be $550 the first year, $605 the next and $665.50 in the third year. Add 25 years to the mix and you can see why investing early is powerful.
Gearing up for a time when you are going to want to kick back worry-free can be easy for younger workers. It requires a change in mindset and a well thought out plan. With that in mind, here's a look at six ways Generation X and Y employees can start saving now for their golden years.
Financial Planning While You're Still Young
1. Adopt a Save First Mentality
We all have monthly bills to pay, but to get ahead, you have to adopt a savings first mentality. Without it, you will never be able to get ahead. This is where a proper budget comes in.
To save effectively, you have to figure out your total expenses and deduct that from your weekly, biweekly, or monthly paychecks. That's how much you'll have left to save. According to TIAA, the financial services company, savers should put away 20% of their income. Less would be a mistake, but in the real world, 20% is way out the question for many people. Luckily, even saving $25 a week can go a long way in growing your nest egg.
2. Stop Shopping and Get on Budget
The most important step to managing your finances is a budget. Without it, saving becomes an impossible task. The budget can't only include monthly bills and transportation costs. It has to include everything from coffee in the morning to ice cream at night. Coming up with a list of every penny you spend in the month will give you the most accurate picture of your finances. Indulging during the month isn't off limits, but reducing the amount you spend on discretionary items can go a long way in boosting your savings.
3. Get Out of Debt to Save
One of the best ways to save money is to have zero to little debt. Loans come with interest rates and fees which, left unchecked, could quickly spiral out of control. Whether you are staring at a personal loan, student debt, or a store charge card, the sooner you get rid of it the better.
Keeping a low to zero balance on any credit products at all times should be your goal. That can be achieved in two ways; the preferred method is going after debt with the highest interest rate first and paying less to the lower interest rate ones. The other option involves tackling the lowest debt first and working your way up. The latter is for those who need to see tangible results to stay motivated. Paying off your debt is one thing, but if you turn around and rack up new debt, it turns into a vicious cycle.
If you struggle to manage your spending habits, consider applying for a card with a lower credit line or being more mindful of what you carry with you when you're out shopping. Carry cash and a single credit card—like one with the best rewards for your shopping plans—for example. Get into the habit of taking time before buying something—it'll help you avoid impulse buys a lot of the time. For example, if something interests you, give yourself anywhere from 24 hours to a week before deciding to follow through on the purchase or not. That way, you'll have the time to really process and prioritize what you want to spend money on.
If you have lots of debt, you can think about taking out a loan to consolidate it all, making one payment a month. For homeowners, taking out a line of credit backed with their property could be an ideal way to get out of crippling debt and pay a lower interest rate.
4. Start an Emergency Fund
No matter how much you prepare, saving for emergencies can be a life-saver. If you don't have money set aside in an emergency fund, it can set back even the best-intentioned plans. Experts say you should have three to six months saved away for those unexpected events. The ideal goal is to have six months’ worth of living expenses parked away, but even if you have two or three months set aside for emergencies, you are doing better than most Americans, as only 24% of Americans have an emergency fund. Adding an emergency savings line to your budget will ensure you are actually putting money away.
5. Find Ways to Get Out from under Students Loans
At last count, the nation collectively owes more than $1.3 trillion in student loan debt, preventing Generation Xers and Yers from buying a car, purchasing a home, starting a family, and saving for retirement. That has a big impact on the U.S. economy. While it is the one type of debt that doesn't get forgiven when you file for bankruptcy, there are ways to lower the amount you owe.
If you have federally backed student loans and they are subsidized, you can request a deferment in which the government pays the interest while you postpone paying back the loan. In order To be eligible for a deferment, you have to show you can't find employment or you have a legitimate economic hardship. Students in graduate school, in a fellowship program, or serving in the military on active duty, may also be able to get a deferment. Lenders may even grant you a forbearance, which means you can stop making payments or make reduced payments for a set period of time, but interest will continue to accrue with that product. People typically apply for forbearance if there is a sudden illness or unexpected problems that make it impossible to pay their loans.
For certain graduates like teachers and lawyers, there are government programs that will forgive the student loans if you work in an underserved neighborhood for a set number of years or commit to working in the state for a set period of time.
6. Tap Your Employer's Generosity
One of the perks of working for a company is that they often offer a mechanism to save for retirement, with 401(k) plans being the main one. With a 401(k) plan, money comes out of your paycheck tax-free and is invested in mutual funds, ETFs, and other actively or passively managed investment vehicles. Often as a way to lure talent, companies will offer to match a percentage of your 401(k) contributions, effectively giving you free money. Yet far too many people don't take advantage of this benefit, leaving free money on the table. With many companies offering a healthy match, that could end up being a big chunk of money.
Even if you have student loan debt, credit card bills, living expenses, and other expenditures, not taking advantage of the company match is a bad move. Experts suggest at least putting away enough in your 401(K) to get the full match, which guarantees a much better return on your investments.
Retirement happens to everyone. But how we live out our golden years is a direct result of how we prepare when we are young. Wait too long and you could end up living a drastically different lifestyle than the one you had envisioned.
That doesn't mean younger people have to pour all of their money into retirement savings, but the earlier you sock away money on a regular basis, the better your chances are for a carefree retirement. After all, with the nation living much longer and healthcare costs among seniors skyrocketing, you could be facing a retirement that lasts just as long as your working years, underscoring the need to save.
Julianne Trenton is a financial consultant with a special focus on retirement planning and savings.
All content provided in this blog is supplied by Julianne Trenton and is for informational purposes only. Barclays makes no representations as to the accuracy or completeness of any information contained in the blog or found by following any link within this blog.