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Millennials and their financial habits often grab the headlines.
And while this generation is often ridiculed for their frivolous spending on oat milk lattes and bottomless brunches, the truth is Americans are getting older. 25 to 40 spend more on essential expenses – such as housing, education, health and child care – than previous generations. Those essential costs have increased in recent years, but wage growth has not kept pace.
So how can millennials be proactive about their finances while still recognizing that sometimes the cards are thrown at them? And what should they prioritize when trying to figure out where to put their limited resources?
Select spoke with Erin Lowry, author of “Broke the money from the millennium talks” and “Broke Millennial embarks on investing“about the biggest financial mistake it sees Millennials make and the steps they can take to get back on track.
Why aren’t millennials saving for retirement?
The biggest financial mistake millennials can make is not saving for retirement, Lowry says.
Millennials frequently cite two reasons why they don’t put money aside for their future, she says. The first is the problem of not having enough surplus to put into retirement once they have covered essential costs and paid off any outstanding debt, such as student loans or credit card balances.
The other reason is that many don’t believe they’ll see a future because of existential threats like climate change, so they don’t see the point in saving for it, Lowry says. In reality, a Pew 2021 study found that nearly 70% of Gen-Zers and Millennials believe the climate should be seen as “a top priority to ensure a sustainable planet for future generations.”
As Lowry sympathizes with millennials who fear climate change, she urges them to continue focusing on building a nest egg for retirement.
“You really guarantee yourself a personal financial apocalypse if you don’t prepare yourself,” Lowry says. “It is important to remember that previous generations faced extremely important world events and that we have always persisted.”
How Millennials Can Start Saving for Retirement
Whether you’re the first group of millennials who don’t invest because they don’t have enough money, or the second group who thinks saving for the future is futile, there are steps no matter what. that can take to develop a concrete investment plan for retirement.
For starters, Lowry recommends that you first take a look at your budget to understand how much money you are making, how much you will need to cover your essential expenses, and how much you need to spend on debt repayment.
Once you have a sense of where your money is going each month, you can take action to prioritize your future. Lowry recommends that people start investing as much as they can and take advantage of their 401 (k) employer.
For example, if your employer is willing to contribute 4%, you don’t have to start by contributing 4%. You can start with 1% and work your way up, increasing every few months. By slowly increasing your contribution over time, you won’t see immediate, dramatic changes in your cash flow, Lowry explains.
If your employer doesn’t offer a 401 (k), you can open a Roth IRA (Individual Retirement Account) instead. With a Roth IRA, your contributions are taxed up front so you don’t pay taxes when you start withdrawing at age 65. (Learn more about how Roth IRAs work.) This is a good option if you plan to be in a higher tax bracket later in life.
Traditional brokers like Charles Schwab and fintech companies like Wealth front offer IRAs with no minimum deposit, a variety of different investment options, and free resources that help you plan for retirement.
If you are looking for retirement investment guidelines, Fidelity Investments recommends that you aim to save the equivalent of three times your annual salary at age 40.
But don’t panic if you’re not near that number. Saving for the future can be difficult, especially when you have so many competing expenses in the present. But it is also crucial. According to a TD Ameritrade Study 2019, nearly two-thirds of millennials (aged 23 to 38) surveyed said they needed to catch up on their retirement savings.
Yet millennials also have a bad reputation. They are much better prepared than many people believe: on average, Millennials have more money saved in their 401 (k) in 2018 than the Gen-X in 2002.
While Lowry encourages people to start saving as soon as possible, she also urges millennials to be compassionate with themselves in the budgeting process, especially if they have faced a financial setback. major, such as the loss of a job due to the pandemic.
“Many of us don’t get proper financial education. We’re not taught to choose investments in our 401 (k). We aren’t taught to manage planning and saving for the future of business. a really practical way. ”she says. “We come of age and think that somehow we’re supposed to know all of this, and then we’re embarrassed to ask. It’s okay to ask. And it’s okay to admit that you don’t know. “
Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.