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Tuesday, October 20, 2020

Big PictureExecutive Checklist

How Millennials Can Work Smarter, Not Harder, at Mastering their Finances… From A Financial Planning Perspective

Millennials are generally described as anyone born between 1981-1996 and often get stereotypically mislabeled as “entitled,” “spoiled,” or “self-serving.” I disagree with this characterization. According to a recent study, 70 percent of millennials believe that working hard and 45 percent believe living frugally puts a person on a path to success. These young to middle-aged adults have had to grow up and enter the workforce during some of the most trying times in our country’s economy. Many millennials were launching their careers during the aftermath of the Great Recession of 2008 and now have been hit harder than older generations during the pandemic –millennials have lost more jobs than any other generation. Housing and education are five times more expensive than it was for Generation X. Plus, many millennials are overwhelmed with student debt, while a college education is needed now more than ever.

One of the smartest ways for millennials to control their future and overcome the socioeconomic events that have occurred during their lifetime is to focus on taking control of their finances. If you don’t strategically budget, save, invest, and control your money, your money will control you.

Here are my top 5 tips for helping millennials master the art of their finances:

  1. Stop living beyond your means
    We live in a world where more people are concerned about capturing the moment than living in it. This hyper-focus on sharing your life on social media accentuates our society’s “keeping up with the Joneses” tendencies. This behavior is a huge contributor to accumulated credit card debt. Credit cards are a useful tool to build your credit, gain travel points, etc. But, if credit cards are used incorrectly, such as buying things with money you don’t have, then they will quickly become your worst enemy that will haunt you for years. My go-to tip for assessing whether or not you should buy something with a credit card is to ask yourself, “Will I be able to pay off this entire credit card bill at the end of the month?” Just making the minimum payment on a balance will lead to accrued interest and a higher debt balance which will damage your credit score. I believe in treating yourself. I enjoy a nice pair of shoes and a delicious dinner at my favorite restaurant too, but only treat yourself if you can actually afford to pay off your credit card bill in full that month. Don’t borrow from the future!
  2. Be a boss at budgeting
    I come across clients all too often who are afraid to take a deep and hard look at their finances. If you don’t know exactly how much money you have coming in every month and how much money you have going out, that’s a problem. Ignorance isn’t bliss. Stop being a wimp. Put on your big girl pants and do your budget! The key to improving your finances is to study them and work hard at them the same way you would for a college exam, except your finances have a much more profound impact on your daily life.
    A good rule of thumb is to devote 50% of income to needs, 30% to wants and 20% to paying down debt. Because your budget is an organic monitoring tool, you should review it monthly to stay on track. It is not a one and done exercise!
    You might be thinking right now that budgeting sounds tedious and boring and you have better things to do with your time.  Absolutely, wrong!  Budgeting is a form of self-love because you will reduce stress with a budget and be healthier because of it! If you don’t want to spend much time budgeting, I suggest downloading a budgeting app that allows you to connect your accounts and easily track your spending in real-time and categorize it for you. A few of my favorites are Mint and Pocketguard, both of which are free.
    If you’re married or with a partner, you both should sit down at least once a month and go over your budget together. Each partner should be aware of the other’s spending, how much money each has, and where it’s going.
    If doing your finances independently is overwhelming, you can hire a financial planner (someone like me). Money is a means to an end. You have to control how you grow it, how you spend it, and how you save it. Budgeting is the first step.
  3. Establish an Emergency Fund
    If the current global pandemic has taught us anything, it is to expect the unexpected. Having an emergency savings fund would have helped many ride out the upheaval of the pandemic.
    Many times, life takes a turn we don’t anticipate and if we have no financial cushion, it can be disastrous. Establishing an emergency savings account with savings to cover 4-6 months of living expenses must be a top priority. Regardless of your income, it is essential that you have an emergency fund as it will be your life raft.  It is a fact, that low income families with savings are more financially resilient than middle-income families without savings.
    Ask yourself, is buying something you actually don’t need, worth NOT having an emergency fund that might get you through an unexpected financial crunch?
  4. Invest in your 401K as early as possible
    I have three daughters who are all millennials and as a mother, I am always giving out unsolicited advice. My No.1 piece of financial advice to each of them is to max out on their 401(k) contributions.  A 401(k) plan is an employer-sponsored retirement account that you can contribute a percentage of your pre-tax salary to. Your contributions will be invested in stocks, bonds and mutual funds.  Essentially contributions and earnings are tax-deferred.  Many employers will match an employee’s contribution to their 401(k) up to a certain portion of their total salary. In 2020, you can contribute a maximum of $19,500 to your 401(k) and if you continue to do so over the years, the compounded growth over the long-term will enable you to establish a solid retirement fund.  Although this may seem like a big chunk of money, remember that it is coming from your pre-tax income so it will reduce taxable income and tax liability too.
    If you don’t work for a company that offers a 401K plan, open up your own traditional IRA or Roth IRA.  An IRA, or individual retirement account, is a tax-deferred savings account opened by an individual.  A traditional IRA is similar to a 401(k) in that contributions are tax-deductible, and earnings and returns grow tax free, and withdrawals are taxed when you withdraw from the account generally in retirement. Contributions to a Roth IRA are made with after-tax dollars but withdrawals are tax free. Roth IRAs have certain income limits that you must be within to contribute to a Roth IRA.   In 2020 you can contribute up to $6,000 to either a traditional or Roth IRA. You can open up an IRA at a bank or with a brokerage firm.
    Not thinking about retirement savings as early as possible can really be a problem for your retirement years, and it will be very difficult to survive on Social Security payments alone in retirement.  Retirement may seem a long way off, but it arrives faster than you think!
  5. Invest with a holistic and strategic plan
    After you have created your budget, established an emergency fund, paid off credit card debt and maxed out on your 401(k) or IRA, you can begin strategic investing. The best way to build assets is to set up automated deposits to invest monthly.  Diversified index funds are a good entry strategy with less risk.
    Robo-advisors, or online advisors, use computer algorithms to build and manage your portfolio based on questions you answer. Most portfolios are composed of low-cost exchange-traded funds (ETFs) and index funds. I prefer more comprehensive financial planning to what robo-advisors offer, and I do not believe computerized, algorithmic trading is the best strategy. There are hybrid services that are partially online, and you can receive unlimited access to a team of human financial planners virtually or by phone. This will offer a bit more personalization.

If you prefer a managed portfolio which will be more bespoke to your goals, I recommend finding a fiduciary financial advisor to assist you with financial planning and constructing a suitable portfolio.  It is risky to create your own portfolio without guidance and a holistic approach.  Financial planning is an invaluable tool to give you clarity in your long-term strategy and to help you achieve your goals over your lifetime.  It will help you to determine how you can fund retirement, college for your children, buying a house, care for elderly parents or any other goals you have. It is organic and can grow and change with your goals.

A recent study found that millennials dedicate 52% of their investment portfolios to cash compared to 23% of other investors. Keeping large cash balances as savings as a long-term strategy will not allow you to keep pace with inflation and successfully provide for your retirement needs.  It is essential to create a strategic investment strategy to grow assets throughout your life.

With intentional planning, saving, debt eradication, and investing, millennials can overcome the aftermath of the extraordinary economic events that happened during the crucial early years of their professional lives and the effects of the current pandemic. It may not be easy, but it will be worth it because striving for a secure financial future is the key to peace of mind and living in dignity in retirement!


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Kimberlee A. Davis, J.D., CDFA®
Kimberlee A. Davis, J.D., CDFA®, Host & Founder of The Fiscal Feminist, a podcast and platform about women and their relationship with money and finances. Her mission is to help all women of all ages and wealth levels embrace their responsibility to themselves to achieve solid financial footing in both calm and turbulent times. Kimberlee Davis has more than 25 years of finance, legal and corporate experience, her career has included being a corporate securities lawyer, investment banker, and Chief Financial Officer. Currently, she is Managing Director and Partner at The Bahnsen Group, a private wealth management firm. As a Bahnsen Group Managing Director/Partner, Kimberlee specializes in personal wealth advising, and financial, retirement and estate planning solutions, for high net worth individuals and multi-generational families. As a Certified Divorce Financial Analyst®, Kimberlee’s proficiency also includes helping her clients transition to financial independence after life-altering events such as death or divorce. Kimberlee A. Davis, J.D., CDFA® is an opinion columnist for the CEOWORLD magazine. Follow her on LinkedIn.