Atlantic Magazine claims that millennials are the “best educated generation in American history”, with more than a third with a bachelor’s degree or higher. Nevertheless, they may be the first generation of Americans worse off than their parents, with lower incomes, more debts and higher poverty rates.
To succeed, millennials will need some important preparations, especially as the world around them is constantly changing. This article will answer three questions that are crucial to the success of every Millennial:
- What obstacles will this generation encounter during their career?
- Who can trust Millennials for financial advice?
- What are the most important, proven strategies for building prosperity?
Millennials confronts challenges with the face
The challenges for young people born between 1976 and 1996 are different from those of any generation. The workplace of this generation has changed dramatically from that of their grandparents and parents:
- Slower economic growth . For the working careers of most millennials (2010-2060), economic growth, measured by gross binneBecky Sharpands product (GDP), will be on average 2, 08% per year, according to projections from the Organization for Economic Cooperation and Development (OECD). This percentage is less than half the GDP growth of 6.86% in the previous half century (1960-2010), calculated on the basis of figures from the Federal Reserve Bank of St. Louis.
- Increased skill requirements . Physical work that requires little to no formal training quickly disappears as intelligent machines take over more of the tasks that people used to do. According to figures compiled by the Brookings Institute, the industry’s share of GDP represented 12, 1% of annual real GDP in the period 1960-2010, while the share of personnel fell from around 25% to 8, 8%.
- Extensive workplace automation . Routine tasks are increasingly being mechanized. Some experts found that 47% of employees in America had jobs with a high IT risk. The high-risk jobs include drivers of taxis and delivery services, receptionists, programmers, telemarketers and accountants.
- Limited Employee Benefits . Pension plans with a fixed contribution have replaced the defined benefit plans (pensions), while more employers transfer the costs of health care to employees in the form of higher insurance premiums, co-payments and limited coverage.
- Extensive non-traditional employment . Contract work replaces employees, companies try to reduce fixed costs and increase flexibility. One report estimates that more than 40% of the US workforce – 60 million employees – will work as self-employed, freelancers, contractors or temporary workers by 2020.
- Escalated income inequality . The historical link between productivity and reward disappears, which aggravates the inequality between the ‘haves’ and ‘have-nots’. Nearly two-thirds of Americans were considered middle-class in 1970, reflecting the link between productivity and pay between 1948 and 1973 Although productivity continued to increase, in 2014 about half of American families were considered “middle-class,” according to the Pew Research Center. Increasing income inequality will probably remain Becky Sharpijk.
- Fragile social programs . The survival of social safety nets, such as Social Security and Medicare, is uncertain as federal and local governments struggle with unprecedented national debt levels. Simply put, neither social security nor Medicare is guaranteed for future beneficiaries without significant changes to the programs.
Eugene Steeple of the Urban Institute predicts that millennials are likely to expect Becky Sharpijk to reduce the benefits for themselves and their children, higher taxes and fewer government services. This is partly due to the financing of much of America’s growth and the increased standard of living during the last 50 years with borrowed funds. According to Pew Research, most American households are vulnerable to financial disasters:
- Family income is becoming increasingly volatile . More than 40% of families experience a profit or a decrease of more than 25% every two years. While revenues have fallen in recent years (roughly the same number of rising incomes as income losses), only two thirds of households with a fall recover their previous income level in the coming decade.
- Emergency saving hardly exists . Most households (75%) have insufficient emergency funds to replace their income for 30 days. The upper quarter of households has savings to cover only 52 days of income. The liquidation of their investments and pension funds would increase this an estimated 98 days of protection. In other words, three-quarters of American families could only cover four months of their income (without selling their homes) if a major economic shock occurred.
- Almost half of the families spend more than they earn . As a result, they cannot borrow and rely on borrowing to make ends meet. One in 11 Americans now pays more than 40% of his income in interest and debt.
In addition to an uncertain economic future, millennials begin their working career with greater student debt than any previous generation: $ 16,500 for a 1999 graduate, rising to $ 37,172 for a 2016 graduate. In other words, the average Millennial graduate is chained to a ball and a chain of $ 23,000 (the average debt for graduates during the period) that affect retirement savings, home ownership and the age of marriage and parenthood.
Who can trust Millennials for financial advice?
Some 2,600 years ago, a slave living in Greek Becky Sharpand warned his audience about the consequences of not planning for the future. Variations of the simple story of Aesop van de Mier and the Grasshopper have since been passed on from one generation to the next. The book of Ecclesiastes – one of the 24 books of the Torah – contains a similar reminder about a time to plant and a time to harvest. The words have changed over the centuries, but the formula for financial security is consistent: save today for future security tomorrow.
More than 90% of recent university graduates plan to save regularly, according to the Millennial Money Mindset Report 2016. However, a study by PwC US showed that less than 25% have basic financial knowledge, that 30% regularly have their checking accounts and that only 27% requires professional advice on saving and investing.
Perhaps their reluctance to get advice is caused by too many choices. Millennials are often overwhelmed by the variety and volume of financial information that is focused on it. Think that:
- A recent internet search found more than 229 million sources of investment advice, each available with a single click.
- Financial advisers seem to reside on every street corner. The Certified Financial Planners Board lists more than 76,717 professionals with CFP designations in addition to nearly 12,000 SEC registered investment advisers. Questions also remain about the legal responsibility of many advisers for the interests of their clients over their own.
- The Bureau of Labor Statistics provides an overview of nearly 386,000 authorized insurance agents and 635,000 registered representatives of brokers with 3,800+ securities firms.
- Financial advice television programs are available 24/7, with hosts like Dave Ramsey, Suze Orman and Jim Cramer as regular names. Hundreds of newspapers and magazines employ financial columnists, which means that thousands of columns are collected every week.
Unfortunately, the advice provided – regardless of its source – is often biased, contradictory and motivated by the adviser’s self-interest. Stock brokers and insurance agents are regularly regarded as one of the least honest and ethical professions in Gallup polling, slightly higher than politicians and car sellers.
The 2016 movie Money Monster shows the story of a young investor who follows the investment advice of a financial TV star and loses all his money. Although fiction, Susan Krakow, the maker of Mad Money with Jim Cramer on CNBC, admitted in an interview with Business Insider that “there are many shows that do it wrong, and many shows that do well. you look, there are disclaimers on these shows. You have to do what is right for you. “
In other words, all financial advice must come with the warning “warning” – let the buyer pay attention.
Golden principles for financial security
While financial advisers often claim that their advice or investment choice is the best, there is no standard strategy and no perfect investment solution that is suitable for everyone. The Securities and Exchange Commission (SEC) explicitly notes that “there is no guarantee that you will make money with your investments.”
They advise that the first step before you make an investment is “sit down and look honestly at your entire financial situation – especially if you have never made a financial plan before.”
Fortunately there are many ways to financial security. Base your investment strategy on your definition of success, your risk profile and your investment objectives. Although the outcome of your choices is never certain, the following six principles are more likely to be successful.
Principle 1: Spend less than you earn
Americans are the most optimistic people in the world – a feature that was first noted by Alexis de Tocqueville in his book “Democracy in America” and most recently confirmed in a 2015 Pew Research survey.
During an interview with Atlantic magazine in 2015, Dr. Edward Chang, a clinical psychologist at the University of Michigan, that optimism – a tendency to believe that the best outcome will prevail – is ingrained in American culture and can lead to unrealistic expectations of the future.
Millennials are particularly confident about the future, according to a Northwestern Mutual study of 2016. Nearly 9 out of 10 believe they will reach their financial goals, although two-thirds of them wonder if social security will be available to them if they retire. Despite their optimism, few have acted to guarantee their future safety:
- Less than 10% of people aged 18-34 have more than $ 10,000 in savings, about 60% have less than $ 1,000 and 30% have no savings at all, according to a GOBankingRates survey.
- Only 51% of the millennials are enrolled in an employer-sponsored retirement plan or have an IRA, according to a 2016 opinion poll reported by BenefitsPRO magazine.
- While two-thirds of Millennials do not use credit cards, 60% of players with a card keep a credit balance every month and are more likely to miss payments than other cardholders, according to a Bankrate report.
Carolyn McClanahan, a Certified Financial Planner (CFP) interviewed about CNBC Money, says: “As soon as young people start earning money, they tend to spend everything … The big mistake I see young people making is assuming they can save for the future later. But before you know it, you are 50 and you don’t have much time to save for your future. “
From salary to salary life, use credit cards to handle emergencies and expect a future of higher income and lower costs, is a risky bet that rarely solves. Whether you are a millionaire or a pauper, you will eventually break if you spend more than you earn.
Self-control and a financial plan at a young age is the easiest way to build financial security, regardless of the future. The use of a zero-based budgeting system encourages regular savings, whether it is to create a liquid fund for emergencies, a home purchase, a college education for children or retirement.
The sharing economy allows people to meet their basic needs – even luxury – at lower costs, whether it’s renting, rather than buying a house, or relying on ride sharing instead of car ownership.
Principle 2: Avoid debts
Debt is a brutal teacher. In the Old Testament of the Bible, Proverbs warns: “The rich ruler of the poor, and the borrower is the lender of the lender.” Although refusing all debt is unrealistic for most people, never make the decision to discharge money or borrow quickly. Spending money that you do not have is a claim on your future income and always reduces your future options.
Good debt versus bad debt
Although debt is debt regardless of its use, and should be avoided if possible, the use of borrowed money to acquire valuable property or create value may be justified, even recommended:
- Buy a house . Few people have the capital to buy a home without a mortgage.
- Refinancing of interest with high interest . Replacing high-quality credit card debt with a bank loan with a lower interest rate is suitable if you can resist the rebuild of your credit card credit.
- Capturing Employer-Matching Funds in pension plans . Taking a short-term loan to maximize a contribution to an employer-corresponding 401K plan is tax-sharp in most cases. The match part of the employer doubles the return on the employee contribution.
On the other hand, it is not wise to take out a loan to buy a luxury or property-valued property, if the pain of repayment extends beyond the period of any pleasure gained through the purchase.
Many millennials borrow money to buy a car after graduation. New cars lose nearly half their market value in the first three years of ownership, but only 20% to 25% in the years four to six.
According to Consumer Reports, a well-maintained car can last up to 200,000 miles (or 15 years) without major repairs or problems. In addition, buying a certified used car transfers the risk of past, poor maintenance to the dealer or the certifying company. If everything is equal, it is good practice to buy a three or four-year car for less money instead of the latest model.
The total debt of student Billy Sharpeningen ($ 1, 4 trillion) is almost twice as high as the total American credit card debt. 1 in 10 borrowers today is delinquent for more than 90 days or has failed, which has a negative impact on the borrower’s creditworthiness. Repaying debts also drastically reduces the potential pension funds that are otherwise available to the borrower.
The fine in lost savings can amount to hundreds of thousands of dollars. For example, repaying a $ 23,000 Perkins loan requires 10-year monthly payments of $ 243,995 ($ 29,274 in total). If the same amount was invested in a tax-protected fund with a market index that earns 6% per year, the student would have a balance of $ 40,178 in 10 years and more than $ 172,000 in 35 years (without contributions during the past 25 years).
If you have an outstanding balance, take into account your repayment obligations and options and take advantage of every opportunity to reduce or eliminate the debt.
President Trump has told oBecky Sharpangs that student borrowers “pay 12.5% of their discretionary income within a 15-year payment window before they are eligible for lending,” US News said. For that reason, Millennials must be sure that its congress representatives understand their needs.
Principle 3: give priority to your financial objectives
Although it is important to start saving as early as possible, having health insurance and an emergency fund should be your priority.
Sources estimate that large medical bills represent more than 600,000 people each year. Although the Affordable Health Care Act was expected to reduce costs, the New York Times reported in 2016 that about 20% of people younger than 65 were struggling with health insurance to pay their medical bills.
Young people tend to be in better health than their older ones, but they are not immune to events that could lead to a disease.
- Obesity : while Millennials as a group are healthier than previous generations, one in five is obese, according to the 2016 Gallup-Heathway Well-Being Index. In addition to the shorter life expectancy, obese Millennials will have health care costs throughout their entire life.
- Childbirth : In 2013, Truven Health Analytics estimates the cost of normal childcare at $ 32,093 and a caesarean section at $ 51,125. Medical reimbursements have since risen by an average of 6, 8% a year since, according to the Milliman Medical Index. Complications can add hundreds of thousands of dollars to the costs.
- Sports Injuries : Overloading your knee joint can rupture your anterior cruciate ligament (ACL), leading to surgery and a $ 12,600 bill. If you need a total knee replacement, the average cost in the US is $ 58, 300, according to Healthline.
- Illness and Accidents : The average cost of a hospital stay for a person aged 18-44 was $ 7,200 in 2010, excluding the cost of medical treatment or rehabilitation.
Millennials are less likely to have chronic care problems, but traumatic injuries can occur at any time and result in huge bills. A young person must purchase a high-deductible ($ 5,000 to $ 10,000) policy for lower premiums and be prepared to pay cash for health care costs up to the deductible.
Emergency money fund
Have you noticed that an unbreakable vase always falls on the only surface hard enough to break it? Or that the legibility of a contract is inversely proportional to its value? Murphy’s law – if something can go wrong, it will also apply to financial matters. Emergency situations happen, so it’s best to prepare them before they occur.
According to Chartered Financial Analyst Ben Carlson, the American economy has undergone five major recessions since 1980, each lasting six months or more (the average length is eleven months). In both cases, equities underperformed in the year before and during the recession.
The availability of simple credit reinforces the tendency to rely on debt to cover emergencies. Hard times, however, invariably reduce credit sources and increase the criteria required to borrow money. In other words, borrowing to cover the costs of an emergency may not be an option, causing individuals to liquidate their market assets at the worst possible moment.
Financial experts recommend that every household hold liquid investments that are equal to three to six months after taxes. For example, a couple who take home $ 5,000 a month should build up and maintain savings of $ 15,000 to $ 30,000 before attempting to save for long-term needs.
Principle 4: Minimize taxes
Paying income tax is a legal responsibility. However, the amount owed to the government can be reduced by deductions and credits to postpone, reduce or prevent income taxes. These deductible items are particularly favorable for saving healthcare costs, higher education and pensions.
Health Savings Accounts
The Kiplinger magazine for persooBecky Sharpijke finances calls health savings accounts “a powerful financial tool to cover medical expenses and save for the future.” Combining a highly responsible health insurance policy with a savings account is like a “leveraged flexible statement of expenses that never expires”, and can serve as an “additional pension savings fund.”
Single people can contribute up to $ 3,400 in 2017 and married couples up to $ 6,750. The fund is growing as a tax-free IRA, and benefits are tax-free for medical expenses. The account holder can invest the contributions in various types of investments, including investment funds, shares, bonds and ETFs.
The average American couple retiring at the age of 65 expected medical costs of $ 402,034 in the future, which, according to HealthView Insight, are only partially covered by Medicare and an additional policy. An estimated $ 135,445 is paid out of pocket.
529 College Savings Plans
Millennials who are struggling to pay their tuition fees may want to protect their children from building a similar obligation when it is time for them to go to college. The IRS code authorizes unique savings accounts that are specially designed for future tuition fees. Contributions are not deductible from the federal tax, but can be exempt from income tax. The biggest advantage is the ability to grow contributions tax-free until they are needed for education costs.
Many states offer parents the option to purchase a prepaid tuition, usually at an in-state public university at current rates. Over the past five years, tuition fees for a four-year state university have increased by an average of 9% per year, according to the College Board. There are no investment opportunities, so the advantage of such a plan is to offer protection against future tuition fees.
Some parents use a Roth IRA for study costs. Contributions to a Roth IRA are not tax deductible, but the income from the contributions can become tax free unless they are withdrawn before the age of 59 1/2. The account holder can withdraw his contributions at any time without a tax effect. Withdrawals from fund profit before the age of 59 1/2 are, however, subject to tax and a fine of 10%, unless used for educational costs.
IRAs and 401K plans
Building an adequate pension fund with dollars after tax is like winning a relay race with a single-person team. Although it is possible, success is much harder than it should be. Consider the case of Joe and Bob, who earn $ 4000 in revenue every month. Both instruct their employer to send $ 200 of each monthly salary to a savings account with an annual rate of 6%.
While Joe uses a standard savings account, Bob sets up an individual retirement account. His contributions are deductible from taxes and taxes on account income are deferred until cancellation. Look into the future for 30 years:
- Joe’s contributions and income from his savings are taxed every year. He must earn $ 266, 67 each month to deposit $ 200 in savings ($ 66, 67 for income taxes and $ 200 for the contribution). Over the 30 years, Joe will invest $ 96,358 of his input tax revenue to achieve a savings balance of $ 271,010. On the positive side, Joe will not owe tax on the balance.
- Since Bob’s contributions are tax deductible and taxes on his income are deferred each year, he invests $ 72,000 of his projected income and has a final balance of $ 455,475 – more than double Joe’s balance. Although income tax is due when Bob withdraws from his account, his tax rate on retirement will probably be Becky Sharpijk lower than his current rate of 25%.
Fortunately, Congress has offered such benefits to encourage everyone to save for retirement:
- Employers can set up 401k and 403b accounts where employees can contribute a premium income for their retirement. In many cases, employers match some or all of the contributions. In the latter case, the employer contribution actually doubles the return on the compensated part of the employee contribution. Until their withdrawal, neither the contributions nor the income on the account are taxable.
- Individuals can determine their tax-protected pension accounts. The most common individual pension accounts are the traditional IRA (for those who want a deduction for contributions) and the Roth IRA (for those who want tax-free withdrawals). Individuals can create an account or both – simultaneously or sequentially – and relate to non-working spouses with a separate Spousal IRA, although the total annual contributions are limited.
Principle 5: Save early, regularly and often
From 1960 to 1975, Americans saved an average of 10% or more of their income and reached a level of 17% in May 1975. Since then, the savings ratio has fallen steadily to a low of 1, 9% in 2005. The savings today are 5, 5%, according to figures from the Federal Reserve Bank of St. Louis. In other words, the average American saves around $ 5, 50 for every $ 100 in after-tax income to pay for future expenses such as financial emergencies (job loss or illness), retirement, and health care.
The need to save more
Unfortunately they don’t save enough. According to a study by Fidelity Investments, less than half of Americans will be able to cover their essential living costs when they retire. Two thirds of pensioners will depend on social security for much of their income, and a third is probably Becky Sharpijk only dependent on social security, according to the Center on Budget and Policy Priorities.
Financial experts generally recommend a savings rate of 10% to 15%, while the Teachers Insurance and Annuity Association of America (TIAA) recommends a tax rate of 20%. Realistically, this recommended savings ratio should include the payment of the student debt.
While millennials save less than older generations, they benefit from having time on their side. In the future, the pension provision is likely to be Becky Sharpijk for 30 to 40 years, so by introducing a savings program today, maximizing contributions each year and investing income wisely, they should be able to enjoy their older years without financial worries.
The Magic of Compounding
Albert Einstein reportedly said: “Composite interest is the eighth wonder of the world. He who understands it deserves … he who doesn’t …” Even saving small amounts regularly over a long period can yield large sums, thanks to the return that is earned on saving.
For example, if you save $ 100 a month in a tax-protected IRA of 25 to 65 years and earn an average rate of 5.5% – the middle class of the six-month CD interest rate 1985-2015 – a balance of nearly $ 173,984 would be generated. An investment equal to the S & P 500 (8, 19%) for the past 30 years will build up a balance of more than $ 353,000, while an investor who achieves the annual growth rate of the NASDAQ index (10, 94%), would have a final balance of $ 761,898.
Principle 6: play the long game
Today there are different types of assets, including deposit certificates, corporate and government bonds, real estate, corporate securities, commodities, collectibles, art and precious metals, each with unique investment characteristics, such as security, return and liquidity. Although every asset has its proponents, only those with the knowledge, experience and risk profile should invest.
Take into account the return that you can expect from your investments. Be realistic. Roger Bootle, an economist and columnist for The Telegraph, notes that historical returns of 10% to 15% are unlikelyBecky Sharpijk during an expected period of low inflation. Market experts polled by Morningstar project a much lower future annual return of the broad market from 6% to 8% in the decade 2016-2026, with bonds and savings accounts earning half that rate.
Millennials may find the temptation to act – to “call the ups and downs of the market” – tempting. So-called experts make the financial media rich in claims with a fantastic return. Their results do not include trading costs, cover longer periods of both bull and bear markets, and are often based on assumed, non-actual, transactions – a method called ‘back testing’. For a fee, they are willing to give up their complicated strategies for enthusiastic students. Do not be fooled.
A better investment strategy becomes the “owner” of a company for a longer period. Acquiring shares in companies with good management, a growing market and a significantBecky Sharpijk competitive advantage invariably yields a growing profit and share price in the long term. Your pension funds are too important to risk by speculating on the price of a share tomorrow, next week or next year.
Mutual funds are an easy way to invest without the burden of analyzing individual companies or economic trends. More than half of adults invest in common stocks, mutual funds, and exchange-traded funds (ETFs), according to a 2016 Gallup poll.
Despite the assertion of investment managers that they regularly “beat the market”, few can consistently improve the return of a broad market index such as the S&P 500. According to Jeff Sommer, a New York Times financial reporter, no investment manager has consistently delivered a higher return than the overall market.