If you missed Part I, which reviews fundamental financial tips for millennials, please click here.
Essential tasks like creating a budget, building an emergency fund and developing a debt repayment strategy can make up a solid foundation for any millennial’s financial plan.
But it’s also important to look beyond the basics and start investing in long-term goals, whether it’s buying your first home or saving for retirement. Here are a few final tips millennials should keep in mind:
Start investing early
Millennials have an advantage when it comes to investing — time. The power of compounding is one of the most important factors in determining whether you will save enough for retirement. Someone who starts saving for retirement at age 20 may have to save much less principal than someone who starts saving at age 35, because their savings have an additional 15 years to grow.
The “Rule of 72” demonstrates the power of compounding: divide 72 by the long-term growth rate you expect to earn on your investments, and you can get a rough estimate of how many years it will take for your money to double in value. For example, if you have accumulated $5,000 in retirement savings by age 25 and expect to earn an average of eight percent per year, your money may double in approximately nine years. At age 34, you may already have $10,000 saved for retirement — and those funds can continue to grow for the next 30 years!
Don’t be overly afraid to invest in the stock market
Many millennials are uncomfortable with investing in the stock market, due to the risk involved. However, investing in stocks can help you achieve the investment growth you need to accumulate adequate retirement savings.
Besides investment growth, stocks can also offer inflation protection. Cash savings will lose purchasing power over long periods of time, because inflation can increase costs. Stocks, on the other hand, will not. Based on age alone, millennials should generally consider having between 70 percent and 100 percent of their long-term retirement accounts invested in stocks or equities.
Low-cost, target-date mutual funds can be great investment vehicles for those who are just starting to save for retirement. These funds automatically adjust the percentage of your account that is invested in stocks as you get closer to retirement and do not require a lot of monitoring. It is always helpful to meet with a financial advisor to determine what allocation to stocks is best for your situation.
Take advantage of your 401(k) plan
A 401(k) plan is a valuable retirement savings tool, and many companies offer it as an employee benefit. It’s also a convenient (and painless!) way to save for retirement; once you set up your deferral percentage, contributions come directly out of your paycheck. Besides the initial setup, 401(k) plans require little maintenance, and soon enough, you won’t even notice the funds coming out of your pay.
For 2015, investors under age 50 can contribute up to $18,000 per year to an employer-sponsored plan. These contributions are pre-tax, which means you pay tax on the contributions when you start taking distributions in retirement. Typically, a Roth 401(k) option provides the greatest benefit to millennials, because contributions are made after-tax and so long as you meet all of the criteria, the distributions in retirement can be tax-free!
As valuable as 401(k) plans can be, some employees overlook the benefits of contributing. The benefit that is commonly overlooked is the employer match, which means a company matches a portion of an employee’s contribution. It’s essentially part of your ultimate compensation from your employer, which an employer contributes on your behalf into your 401(k). If your company offers this benefit, try to take advantage of it! At the very least, you’ll want to contribute the percentage of your salary that is required to receive the match. For example, if your employer matches 25 percent of the first six percent contributed to the plan, you should aim to contribute at least six percent of your salary in order to receive the full match.
Keep in mind that matching contributions are often subject to a vesting schedule. If you leave the company before you are fully vested, you will forfeit some or all of the money your employer has contributed (but not the money that you contributed to the account). Your employer may offer periodic enrollment meetings to help explain the terms and conditions of your 401(k) plan. If so, it is a good idea to attend one of these meetings (if you haven’t already) and familiarize yourself with the plan.
Monitor your credit score
So you paid off your credit card and student loans, and you pay all of your bills on time? There’s still one more thing you’ll need to track: your credit score. It’s important to keep tabs on your credit to ensure that all of your information is reported correctly and that it hasn’t fallen into the wrong hands. After all, you wouldn’t want all of your diligent planning to go to waste. Federal law allows you to obtain three free credit reports each year from one of the major credit reporting bureaus: Experian, Equifax and TransUnion. At most, you can obtain one report from a different agency every four months. You can sign up for your report at AnnualCreditReport.com, which is currently the only resource authorized by federal law.
When you receive your report, you should carefully review the information to verify that you recognize the accounts and loans that are listed. Look for any warning signs of identity theft, such as strange credit card charges, denials of credit, unfamiliar accounts and bills that arrive at unusual times. If any of the information appears suspicious, you should contact the company that issued the report immediately.
Once you’ve taken steps to get your financial life in order, feel free to treat yourself (in a financially responsible way, of course). Did you finally reach your emergency fund savings goal? Start saving for the European trip that you’ve always dreamed of taking.
While it sometimes requires sacrifices, a financial plan can give you comfort in knowing you have a plan in place to reach your goals, so you can spend your time enjoying all that life has to offer.