Student loan debt is at an all-time high of around 1.4 trillion dollars. The cost of going to college has dramatically outpaced the rise in wages. That figure is a combination of debt from getting a degree ranging from bachelor’s to doctorate. While higher education is vital in a competitive job market, the financial impact can be a burden when saving for a house or retirement. In this article, we cover five tips for saving money to avoid a Millennial saving crisis.
The Federal Reserve’s publications on student loans highlight the following key takeaways:
- Those with a bachelor’s degree tend to do better than those without a bachelor’s degree.
- The school you choose for higher education can play a huge role in how much debt you acquire. Private for-profit schools seem to carry the most considerable financial burden.
- The younger people are, the less confident they feel about having enough for retirement at this time.
With that said, let’s look at how we can take retirement savings to the next level. We’ll focus on positioning a Millennial to feel confident about retirement. Here are some suggestions to tackle student debt fast, while simultaneously saving for retirement to avoid a Millennial Saving Crisis later in life.
5 Tips to Avoid A Millennial Saving Crisis
1. Calculate a Budget for Yourself
You need to know how much you make after taxes, health insurance, and 401(k) contributions are taken out of your paycheck. Once you know how much you make per month, you will need to note essential payments. These essentials can include rent/mortgage, student loans, insurance, transportation, internet, utilities, and car payments. This calculation leaves you with your budget for food, fun, entertainment, and rainy day savings. Budgeting is the absolute first thing everyone should do to properly manage debt, savings, and retirement at the same time. You need to know the cost of your essentials to calculate how much you can save. Then, give yourself a budget on which to live. Stick to your budget! For more information on budgeting, view our article “Budgeting Made Simple for Millennials.”
2. Become (and Remain) Credit Card Debt-Free
If you have any credit card debt, make sure this is your top priority to pay off ASAP! After calculating your budget, pay more than the minimum payments, if possible. Cut costs where you can and eliminate credit card debt ASAP. Credit card debt has high-interest rates compared to other debts. Credit card interest rates range from 15-29%. This rate is in comparison to 5% or less on a student, home, and auto loan. Credit cards are not for everyone. Being in credit card debt means you are paying someone else hundreds or thousands of extra dollars for the luxury of buying something you cannot afford at the time. Pay off your credit card debt rapidly to begin paying off other debts, save, or invest more.
3. Live Within or Below Your Means
If you have ever read the book Rich Dad Poor Dad by Robert Kiyosaki, you would have learned wealthy people live below their means. We are not talking about the ultra-rich with money to burn. We are talking about those who start with little to nothing and amass wealth over time. Every little bit adds up. You don’t need to buy a brand new car and take on debt when your current car with 100K miles is still working fine. If you take on debt to buy a new car, you are losing money. You lose money by paying interest to the bank each year without a return as your car’s value decreases.
You don’t need to put 20% down on a $400K house, instead, try and find one for $250K. This type of person will think twice about splurging on the latest Jordan shoes, eating out multiple times a week, and getting expensive coffees daily. Kevin O’Leary from Shark Tank said it best, “Anytime I pick up something I’m going to buy, I say to myself, ‘Do I really need this?’ Because if I don’t buy it, the money is going to be invested and make money every year for me while I’m sleeping.” You can still live a great happy life without having the luxuries of a new car, dream home, and the latest fashion.
In the famous book, The Great Gatsby, all the world’s money could not buy Mr. Gatsby happiness. Despite having all the money needed, he was still unhappy. Happiness is what you make of it and is a whole conversation and article in itself. Stay tuned for the next article in our Millennial Financial Series.
4. Reduce or Eliminate Your Housing Costs
There are two ways to easily do this.
The first way is to live with your parents. Live with your parents. There is nothing wrong with living with your parents for a few years to eliminate your debt and save money. Doing this could be a huge deciding factor in paying off student loans in three years vs. ten years. Reducing or eliminating your housing costs could mean the difference of several thousand dollars. This saved money can be used as a down payment on a house of your own.
Second, get a roommate. If you rent or own and have room to spare, consider getting a roommate. A roommate will provide extra income to help lower the cost of rent and utilities each month. Use these savings to pay off your student loans or build up a safety net for emergencies.
5. Begin Saving for Retirement Now or Pay off Student Debt
If your student loan interest rate is 5%, then paying off more than the minimum is similar to getting a 5% return in the stock market. It is 5% less than you have to pay in interest on your loan. You can use the money saved by paying off student debt to invest.
On the flip side, you may receive a 401(k) match at work. If your employer matches 4%, congratulations, you just gained 4% in addition to your salary. Put the 401(k) contributions into investments, and you are well above the 5% return you would make per year by paying off student loan debts. At a minimum, especially while trying to eliminate student debt, you should be contributing to your 401(k) up to your employer match. The reason being is this is free money you would otherwise not receive from your regular paycheck. Can you say “no” to free money? And the compounding gains year over year will far outweigh the cost of paying off your student loans quicker.
What If My Employer Does Not Match 401(K)?
If your employer does not offer a 401(k), this may change your thinking. You may want to consider opening an IRA account to save money for retirement. While you will not get a match from your employer, IRAs offer tax-deferred growth on gains in the account. Traditional IRAs are tax-deductible up to a certain income level, which can mean money in your pocket via a tax refund. On the other hand, Roth IRAs offer no tax deductions but can be a great emergency fund as gains grow tax-deferred. With Roth IRAs, you can always take distributions tax and penalty-free. After five years of owning a Roth IRA, you can take out gains. You will only have to pay a 10% early-withdrawal penalty on the portion of the gains if you are under 59 ½.
Start Saving as Early as Possible
The key is to start as young as you can and be consistent. The later you start, the more you’ll have to contribute in the future to get to a comfortable retirement fund. Alternatively, you may have to work longer. It will be best if you arrange to have money automatically come out of your paycheck to your 401(k) or an IRA. Saving is much easier when it is automatically taken out of your paycheck. You will grow accustomed to the smaller paycheck much quicker, and it will make budgeting much less complicated.
How Much Should I Save for Retirement?
Inflation runs about 2% per year. $50K today will likely be worth $25K in 30 years. So again, the important things are to start as early as possible and be consistent. To be fully prepared to retire at 65, here are the recommended guidelines for retirement savings by age:
30: Have the equivalent of your annual salary saved. So, if you earn $50,000 a year, aim to have $50,000 in savings when you reach 30.
35: Twice your annual salary saved.
40: Three times your annual salary saved.
45: Four times your annual salary saved.
50: Five times your annual salary saved.
55: Six times your annual salary saved.
60: Seven times your annual salary saved.
65: Eight times your annual salary saved.
Remember, everyone’s situation is different. Please do not compare yourself to others; we all have to start somewhere. The key to avoiding a Millennial savings crisis is to live within or below your means while simultaneously paying off your debt and saving at the same time. It can be done, but will require discipline in setting a budget and sticking to it! If you are serious about your budgeting, you will likely feel some financial pain now but reap the rewards and come out ahead in the long run. This plan is not a get out of debt/get rich quick scheme and will take years before you see/feel the rewards.
Budgeting Tools That Millennials Love
Are you struggling with budgeting? Use an app such as Mint, Simplifi, or Dave Ramsey’s Every Dollar. These apps can consolidate your accounts and break down your expenses into categories, making things easier to view. They can also send you alerts when your balance is low, or you have upcoming bills.
If you have any questions regarding your investment options or additional tips to avoid a Millennial saving crisis, please contact Midland Trust at (239) 333-1032 or visit www.midlandtrust.com. We would be happy to discuss our services with you and how you could incorporate self-directed IRAs into your investment portfolio.
Read the other articles within our Millennial Finance Series: “Budgeting Made Simple for Millennials,” and “Budgeting with the Goal to Save and Invest for Millennials” for additional tips.
MIDLAND TRUST IS NOT A FIDUCIARY: Midland’s role as the custodian of self-directed retirement accounts is non-discretionary and administrative in nature. The account holder or authorized representative must direct all investment transactions and choose the account’s investment(s). Midland has no responsibility or involvement in selecting or evaluating any investment. Nothing contained herein shall be construed as investment, legal, tax, or financial advice or as a guarantee, endorsement, or certification of any investments.