Budgeting: To Take Back Control of Their Finances, Millennials Need to Embrace the ‘B’ Word
It’s not sexy, but budgeting has many benefits, and millennials need all the help they can get.
There’s no escaping the fact that millennials have been dealt a tough financial hand.
Many of them have lived through at least two big recessions, the second caused by an unprecedented pandemic that has dented their employment prospects.
The coronavirus crisis has recently led them to be branded the “unluckiest generation in U.S. history.” Changes in the economy and job market mean they earn about 20% less than their Boomer parents did at the same stage in life, despite having higher education levels. They can also expect far less of a retirement cushion than their parents got, with the future of Social Security in doubt and company pension plans largely a thing of the past.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Add in student debt, rising health care costs and the difficulty of getting on the homeownership ladder and it’s easy to see why many who are under 40 feel overwhelmed and helpless when it comes to saving for retirement. Some 62% of millennials say they’re living paycheck to paycheck, according to a 2019 survey by brokerage Charles Schwab.
The good news is that there’s a simple, highly effective way for young adults to get a grip on the situation and take back control of their finances. Unfortunately, it’s also quite dull, making it a hard sell to a generation that is very busy and wants to enjoy life to the fullest possible.
The solution: Budgeting
Making a budget taps into a powerful aspect of human nature that we all know — that writing down your goals makes them more likely to happen. It also reveals insights into self-destructive spending habits that would otherwise have gone unnoticed.
Even as a professional financial adviser, I can let my spending slip if I’m not staying on top of it. I used to spend way too much at my favorite department store, for example, going in for a couple of essential items and emerging with a bunch of stuff I really didn’t need. It was only when I tallied my spending and committed it to paper that it became “real” and prompted me to take action that saved me thousands of dollars a year.
Even small spending cuts can have a big impact on savings over time. Switching from that $6 fancy latte to a $2 regular coffee every morning creates more than $1,000 in annual savings.
One positive: Time is on millennials’ side
This is an effective tool for people of all ages, but it’s particularly essential for millennials, because of their spending habits and the length of time they have to accumulate savings. That same Charles Schwab survey showing that millennials live paycheck to paycheck also found that they spend an average of $478 a month on non-essential items, like dining out, entertainment and vacations. Boomers only spent $359 on those items.
There’s clearly room for some millennial belt-tightening. Budgeting enables them to pinpoint where to do that and divert cash toward the essential goals of building up a three- to six-month emergency reserve and contributing to investment accounts like 401(k)s and Roth IRAs.
Those investments create wealth over decades through the power of compounding, and the younger you start saving, the better. Starting a regular investment habit early in life is particularly crucial because, in addition to their other disadvantages, younger people are facing the prospect of lower market returns. The stock market returned an average of 10.2% a year from 1926 to 2019. That’s projected to fall to 7.3% over the next decade.
Better relationships and less stress through budgeting
For couples, budgeting can also provide powerful therapeutic benefits. The process of sitting down together to make a budget may result in uncomfortable but ultimately healthy conversations about each partner’s spending priorities and life goals. This should be an ongoing conversation to review and revisit plans as life circumstances change.
Younger people often see budgeting as taking the fun out of life. But it actually has the effect of reducing anxiety over purchases and allowing you to really enjoy the ones that you know you can afford and have planned for.
The tools for budgeting are less important than maintaining the commitment to do it. There’s a wide selection of online budgeting tools and apps to choose from. Excel spreadsheets enable you to populate spending categories, set budgets and differentiate between fixed and variable costs. But a simple notepad and pen system can work just as well.
One positive aspect of millennials’ approach to finances is the interest they have in the burgeoning financial independence movement. Reddit boards and other online forums are crowded with tips on how to cut spending to the bone and build up a big-enough stash to buy freedom from the traditional 9 to 5.
Keep everything in perspective
Anything that encourages stricter budgeting is positive in my view, but people also need to be realistic about how much they need to retire. It all comes down to spending habits.
I have had conversations about “running out of money” and budgeting with clients who have over $20 million in investment assets, and I have many clients who can live comfortably for the rest of their lives on well under $1 million. Spending is the most important variable, and that’s why it’s hard to have a rule of thumb about how much in investments the average person needs to retire.
None of this is to gloss over the very real financial challenges that younger people are facing. But disciplined budgeting is a simple way for them to regain control and build the freedom they want, rather than just being a victim of outside economic forces.
Jaime Eckels, CFP, has been helping clients achieve their financial goals for 20 years and specializes in developing savings behaviors, implementing debt-reduction strategies, analyzing client cash flows, defining investment policy, determining portfolio allocations, minimizing income taxes and maximizing client balance sheets.
-
Strategies to Optimize Your Social Security Benefits
To maximize what you can collect, it’s crucial to know when you can file, how delaying filing affects your checks and the income limit if you’re still working.
By Jason “JB” Beckett Published
-
Don’t Forget to Update Beneficiaries After a Gray Divorce
Some states automatically revoke a former spouse as a beneficiary on some accounts. Waivers can be used, too. Best not to leave it up to your state, though.
By Andrew Hatherley, CDFA®, CRPC® Published
-
Strategies to Optimize Your Social Security Benefits
To maximize what you can collect, it’s crucial to know when you can file, how delaying filing affects your checks and the income limit if you’re still working.
By Jason “JB” Beckett Published
-
Don’t Forget to Update Beneficiaries After a Gray Divorce
Some states automatically revoke a former spouse as a beneficiary on some accounts. Waivers can be used, too. Best not to leave it up to your state, though.
By Andrew Hatherley, CDFA®, CRPC® Published
-
What’s the Difference Between a CPA and a Tax Planner?
CPAs do the important number crunching for tax preparation and filing, but tax planners look at the big picture and come up with tax-saving strategies.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
Charitable Remainder Trust: The Stretch IRA Alternative
The SECURE Act killed the stretch IRA, but a properly constructed charitable remainder trust can deliver similar benefits, with some caveats.
By Brandon Mather, CFP®, CEPA, ChFEBC® Published
-
Three Ways to Take Control of Your Money During Financial Literacy Month
Budgeting, building an emergency fund and taking advantage of a multitude of workplace benefits can get you on track and keep you there.
By Craig Rubino Published
-
How Did O.J. Simpson Avoid Paying the Brown and Goldman Families?
And now that he’s died, will the families of Nicole Brown Simpson and Ron Goldman be able to collect on the 1997 civil judgment?
By John M. Goralka Published
-
What Not to Do if an Employee or Loved One Is Kidnapped
Businesses need to have a crisis plan in place so that everyone knows what to do and how to do it. Sometimes, calling the authorities isn’t recommended.
By H. Dennis Beaver, Esq. Published
-
Why You Shouldn’t Let High Interest Rates Seduce You
While increased interest rates are improving the returns on high-yield savings accounts, that may not be an effective place to park your money for the long term.
By Kelly LaVigne, J.D. Published