personal finance

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.

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. 

About the Author

Jaime Eckels, CFP

Relationship Manager, Plante Moran Financial Advisors

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.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
How to Calculate the Break-Even Age for Taking Social Security
social security

How to Calculate the Break-Even Age for Taking Social Security

When it comes to maximizing your Social Security benefits, there are many elements to consider. One factor that can be especially enlightening is your…
August 30, 2021
Spend Without Worry in Retirement
Financial Planning

Spend Without Worry in Retirement

Fears of running out of money prevent many retirees from tapping the nest egg they’ve worked a lifetime to save. With these strategies, you can genera…
August 30, 2021

Recommended

5 Key Points to Consider Before You Claim Social Security
social security

5 Key Points to Consider Before You Claim Social Security

The big decision every retiree has to make is when to start taking their Social Security benefits. Here are five things to think about as you weigh yo…
September 16, 2021
I Have a Financial Adviser. Is It Time for My Adult Children to Get One, Too?
personal finance

I Have a Financial Adviser. Is It Time for My Adult Children to Get One, Too?

When you’re young and broke, there’s not a lot of need for a financial adviser. But there comes a time when all that changes. Here are four tipping po…
September 16, 2021
Hey, Entrepreneurs: This is NOT the Way to Solicit Money from Investors!
entrepreneurship

Hey, Entrepreneurs: This is NOT the Way to Solicit Money from Investors!

Getting money for your hot start-up idea the wrong way can get you into hot water. Do some research before you take money from friends or other potent…
September 15, 2021
Financial Conversation Starters for Couples
personal finance

Financial Conversation Starters for Couples

Instead of reaching for the remote and an evening of Netflix, why not get really intimate … and talk about money instead? Sharing the same financial g…
September 14, 2021