Money and Millennials
As members of the Millennial generation – loosely defined as those born between 1981 and 1996 – we are part of one of the country’s largest financial demographics. Millennials are forecast to compromise 75% of the global workforce by 2025(1), and one recent study shows that this generation will see their wealth grow five times over in the coming years as we stand to inherit almost $70 trillion in the next decade in the “Great Transfer of Wealth”(2).
When it comes to money matters, we definitely have a lot on our minds – and rightfully so. This generation is in a period of life defined by several big (and expensive!) life transitions, including starting a career, paying student loans, saving for or buying a home, planning a wedding, family planning, and saving for retirement.
With a number of big financial decisions upon us or on the horizon, it’s important to establish and maintain good financial habits. So Millennials, let’s dive into the concept of cash flow planning and explore a few tips for building wealth and fostering a strong financial mindset.
Cash Flow Planning
Cash flow planning comes down to a simple and important equation…
Income – Taxes and Expenses = ?
What do you have left over after you subtract your expenses from your income?
The goal of cash flow planning is to have excess cash each month to build your wealth over time. The concept is simple, but the reality can be much more challenging, especially if it reveals some not-so-good information, like running a shortage each month that’s eating into your savings. While the truth may sting initially, cash flow planning gives you the power to modify or strengthen your financial habits to help you reach your short-term and long-term goals – like going on a vacation, paying down student loans, buying your dream home, or retiring comfortably at a decent age, to name a few.
If your current lifestyle does not match up with where your budget needs to be to meet your goals, some stronger financial discipline may be in order. Finding that you live well beyond your means relative to the goals you have for yourself and your future family may require you to dial back your spending. Or vice versa, maybe you can afford to live a little less frugally and take that vacation you had planned. It’s all about determining a healthy balance that allows you to cash flow positively after accounting for your taxes and expenses.
Tracking Your Savings and Setting a Budget
A budget is a useful tool that can help you gauge your progress in working towards your goals. It allows you to keep track of all of your income and expenses each month (to help you solve for the cash flow planning equation above) and shows you your financial responsibilities and where you may be able to cut unnecessary expenses. Keep the following tips in mind as you create your budget:
- Review Trends in Your Spending: Gather your last 6-months’ worth of credit card statements. Where is most of your money going? Expenses like rent, utilities, and bills are fixed costs and should be kept within a reasonable percentage of your gross monthly income (rule-of-thumb – < 28%). What about your discretionary spending – is it also reasonable? Input these numbers into your budget.
- Use a Format that Works for You: Your budget can be in the form of a Word document or an Excel spreadsheet, or you may want to use one of the many mobile budgeting apps available, such as Mint, PocketGuard, or Personal Capital. Use whatever options helps you to best keep track of your expenses and understand where you are at financially.
- Set a Reasonable Budget: This one works in both ways. Make sure your budget is leaving you some excess cash to save for your goals, but also do not implement such a restrictive budget that it doesn’t allow you to still live a satisfying life.
- Leave Room for Non-Recurring Expenses: It’s important to leave some cushion for unexpected expenses. Millennials often fail to consider the expenses associated with celebrating their family and friends’ weddings or furnishing their new house or apartment, which are common occurrences during their current period of life. Additionally, unexpected shutdowns and interruptions from the COVID-19 pandemic resulted in many unfortunate situations where people had to utilize savings in order to keep their life on track. By leaving some wiggle room in your budget, you set yourself up for success if/when unexpected expenses come your way.
- Pay Yourself (Your Future Self!) First: Knowing how to allocate your excess cash efficiently is vital to the success of a financial plan right off the start. If you have the capacity for saving, start saving for retirement as soon as you can. Set up automatic contributions to your retirement plans (so you don’t even “miss” the money) and if your company offers an employer-match on a percentage of your contributions, make sure to contribute enough to at least secure the match. This is often referred to as “free” money… and who doesn’t love that!? Why the urgency to start saving for retirement so early? Your young age is a superpower because of the benefits of compounding interest, the concept of continually reapplying interest to a principal that is growing over time. In other words, the earlier you start investing and saving now, the less risk you will need to tolerate, and the more money you stand to make over time.
- Stay the Course: Budgeting is not a one-time event you get to check off on your to-do list each year. It’s best to revisit your budget at least once per month to increase your chances of making your goals come to fruition and keeping yourself accountable. Plan for the long-term, and continue to stay disciplined and on course.
The game of life is complex –we’ve experienced that first-hand as the Millennial generation – and there will be more bumps and unpredictable challenges that we’ll encounter along the way. But we can start to prepare for these responsibilities and tackle them with full force by putting our best effort into being financially disciplined now. So, don’t wait and start saving for your retirement as soon as possible, track your savings and spending to ensure you’re on the right track, and stay the course. By doing this, you’ll be setting the stage for a well-managed financial life that promises to pay off for you and your loved ones now and in the future – and you just can’t put a price on that.
And of course, we’re always available to walk with you on the journey towards building a successful financial life. Please don’t hesitate to contact us if you’d like to have an in-depth cash flow planning conversation to addresses any of the concepts shared above.
- The (Millennial) Workplace of the Future Is Almost Here — These 3 Things Are About to Change Big Time. Peter Economy. January 15, 2019.
- Financial Advice and Tips for Millennials. Brian O’Connell. November 21, 2019.