Millennials are one of the largest demographic groups in the United States and represent a significant percentage of economic activity. With online banking and apps replacing more traditional methods of tracking finances, it’s easier and more important than ever for millennials to develop financial literacy. Here are some financial literacy topics and advice for you to consider when planning for your future.
1. Setting up a Budget
Establishing a budget is one of the most important steps to take when determining what your financial future will look like. It is important to have a clear picture of your monthly income and expenditures to avoid surprises. Today, there are numerous mobile apps on the market that make budgeting easier than ever before. Apps like Mint and You Need a Budget (YNAB) categorize income, bills and expenditures to encourage the user to live within their means. Over time, tracking daily expenses helps the user build long-term budgeting habits. Other apps invest a small percentage of expenditures into an exchange-traded fund (ETF).
Apps like these provide you easy to use tools to take control of your financial future. Most millennials love using their mobile devices, so utilizing budgeting apps like these is an easy decision.
2. Managing Credit Cards
When utilized properly, credit cards can be a great financial tool for millennials seeking to build credit. However, credit cards can easily be misused, leading to missed payments, high interest rates, and debt accumulation. In fact, the average American household owes $15,654 in credit card debt. Although millennials are opening credit cards at a lower rate than their parents, it’s important for you to fully understand how credit cards work before deciding to open a new line of credit.
One of the common pitfalls of credit cards is high interest rates. When you sign up for a new credit card, there is often an interest-free grace period in which balances can be carried month to month with no additional penalty. However, when this grace period ends, interest charges can quickly snowball as the card balance rises and it becomes more difficult to pay it off.
When signing up for a new card, make sure you understand the terms of the card and don’t spend more than you can afford to pay off each month when your balance is due. Credit cards are a necessity when it comes to booking a hotel room or renting a car and they feature useful tools like purchase protection, fraud protection and extended warranties.
3. Building Your Credit Score
Although many millennials are wary of credit cards because they may already have other debt, such as student or auto loans, credit cards can be a valuable tool to build a credit score. Having a good credit score is important for a number of reasons. Without credit history, loan officers are less likely to give you a mortgage, auto or personal loan. Maintaining a low credit card utilization rate and paying off the balance each month can help you build up your score over months and years. Even buying a cup of coffee once a month with your credit card, and always paying it off on time, can help increase your credit score.
Major credit card companies make it easy to use their cards with apps to track your charges and make payments. You can also set up automatic payments so you never risk a late fee or paying interest rates for an outstanding balance. Over time, responsible credit card use will build your credit score to show lenders that you are a safe bet for a loan. You can check your credit report online once a year to make sure there are no fraudulent accounts that can hurt your financial standing. Many of life’s major events, like buying a home or a car, require a good credit score.
4. Managing Student Loans
Americans in their 20s with student loan debt have an average balance of about $22,135, which is the equivalent of an average $351 in monthly payments. This debt burden is why many millennials are hesitant to open new credit cards. If you are considering using student loans to finance your education, you should first educate yourself on the differences between loans, grants and scholarships. Also, be aware of the differences between federal and private student loans. Knowledge of the financial assistance options available to you, and the positives and negatives of each, can go a long way in ensuring you are building a secure financial future.
5. Planning for Retirement
Retirement is a financial topic that many millennials haven’t spent much time thinking about. In fact, almost half of millennials haven’t started saving for retirement. This is partly caused by underemployment and lack of disposable income, with millennials prioritizing other necessities.
For a median-income millennial to retire at 67, he or she needs to start saving 4% to 9% of pre-tax income starting at age 25. This is achievable because of the power of compound interest – from 1973 to 2016, the average annual return of the stock market was 11.69%. By investing in your retirement starting in your 20s, and continuing through your working life, you can build a foundation for a secure retirement.
Start with these topics to build a solid foundation of financial knowledge. You will be well on your way to financial independence and achieving both your short-term and long-term goals.