The financial fallout from COVID-19 has had an outsized impact on Millennials. In fact, a survey by the Pew Research Center found that 32% of younger Americans said the COVID-19 pandemic was a bigger threat to their finances than to their health.
According to our own upcoming Advisor Authority study of more than 2,500 advisers, financial professionals and individual investors, during the pandemic Millennials have been the generation that is far more likely to take a pay cut, be laid off from a job and take on added responsibilities as a caregiver for a family member or friend.
Millennials have already faced their share of financial challenges. Coming of age during the Crash of 2008 and the Great Recession, saddled with more student loan debt than any other generation, many Millennials have been forced to put important life decisions on hold — from buying a first home to starting a family. Now, facing another “once-in-a-lifetime” financial challenge brought on by the pandemic, 84% of Millennials say they could do all the right things to manage their finances, and still be blindsided by outside events.
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If you’re a Millennial, the struggle is real — and so are your fears. But there is a light at the end of this tunnel, and time is on your side. Here are five tips to help Millennials manage their finances during the pandemic.
Tip #1. It’s All in the Search: Find a Financial Professional
For many Millennials, the pandemic has been a financial wake-up call. According to a COVID-19 Flash Poll conducted by the Nationwide Retirement Institute, younger Americans are more likely to delay paying their bills and increase their credit card debt, sell shares from their retirement plans, such as 401(k)s and IRAs, or from their other investment accounts in order to meet their financial obligations.
Roughly two-thirds of younger Americans said the pandemic has made them realize that they need help managing their finances and investments to succeed in the future. If this sounds like you, don’t wait. By working with an adviser or financial professional, you can develop a plan that fits your financial goals at every stage of life — from working and saving right now, all the way through your retirement years — to have greater confidence about your finances and your future.
To find an adviser or financial professional, trust is important. If possible, ask friends and family for recommendations. If that’s not an option, your bank may offer financial planning services. Search online for advisory and wealth management firms. Consider sources such as the National Association of Personal Financial Advisors at www.napfa.org or the CFP Board at www.letsmakeaplan.org. Nationwide offers this resource to help you find a financial specialist who’s right for you.
Get specific. Find out if they can make your safety a priority, with a true digital experience, from a client portal to mobile aps and e-signature solutions. Find out what services they provide and what types of clients they serve. Ask how they are compensated — fee for service, percentage of assets under management or commissions. If your resources are limited, some advisers and financial professionals will even help you set goals and develop a basic financial plan for a one-time fee.
Remember: The short-term cost of getting good guidance from an adviser or financial professional is one of the smartest investments you can make in yourself.
Tip #2. Resist Temptation: Commit to a Monthly Budget
It can be easy to get caught up in buying the latest device and hottest trends. Especially now that we’re spending more time at home, living our lives online, while social media is targeting us with ads, things are instantly available at the click of a button, then delivered direct to our doorsteps overnight.
There’s true power in a monthly budget to track your spending habits, prioritize where your money goes and to keep your expenses under control. Take small steps if you need to. Cut back on multiple streaming services, cancel subscriptions you don’t frequently use, and watch your money add up over time.
Instant gratification is hard to resist. But it’s important to balance your wants with your needs, especially during uncertain times like these.
Tip #3. Pay Yourself First: Make Saving a Habit
Once you have your monthly budget, make savings your No. 1 line-item. Pay yourself first — even if it’s just a few dollars a month. As you scale back on other expenses, pay off student loans or credit card debts, all of this extra money can go straight into your savings too.
When you’re able, set up a rainy-day fund to cover unanticipated expenses, such as car repairs or home repairs. Then set up a separate emergency fund, so you have a cushion to cover several months of ongoing expenses, such as your rent or mortgage, utility bills and car lease payments.
During the pandemic, being unable to meet financial obligations is a top concern for the majority of younger Americans. Get into the habit of saving so you can be ready for the unexpected.
Tip #4. Time is Money: Maximize Tax Deferral
With decades before you’re ready to retire, the power of tax-deferred compounding can be substantial. Tax deferral allows you to minimize your tax bill now and accumulate more over time.
Start by automatically contributing to a tax-deferred qualified plan at work, such as a 401(k). This allows you to invest pretax dollars in a variety of mutual funds. Pay attention to fees and keep costs low as each dollar and every percentage point counts. Contribute enough to secure a match from your employer.
When you’re able to max out your 401(k), be sure to consider traditional IRAs to save even more tax-deferred. Also consider Roth IRAs. You’ll make contributions with after-tax dollars — meaning you pay taxes upfront. But your savings accumulate tax-free and distributions in retirement are tax-free too.
Tip #5. Think Long Term: Manage Risks and Returns
While you’re still accumulating savings, and your retirement is decades away, it can be worth taking on market risk now to build more wealth in the long term. Remember, with more than 30 to 40 years of investing ahead of you, staying invested in the market has historically produced the best long-term results . An adviser or financial professional can help you build a well-diversified portfolio to help safeguard against falling markets, ongoing volatility and record low interest rates.
If you are fortunate enough to have substantial assets, if you’ve maxed out your qualified plans and you’re looking for greater protection, your adviser or financial professional may be able to recommend an annuity. Annuities are long-term, tax-deferred investment vehicles designed for retirement. They can help you protect against the market’s downside, while allowing you to capture some of its gains. When you’re ready to retire, they can provide you with a guaranteed income stream for life. As traditional pension plans are disappearing from the workplace — and the responsibility of preparing for retirement rests squarely on your shoulders — you could think of it as a way to provide more protection for your retirement.
According to our 2020 Advisor Authority study, the adoption of annuities is on the rise, especially among younger investors. Nearly three-fourths of Millennial investors (73%) say they would feel more secure if a portion of their portfolio was invested in an annuity. Likewise, 72% of Millennials say they would choose an annuity to protect their investments against market risk and 71% would choose an annuity as part of their holistic plan to protect against outliving their retirement savings.
Keep in mind, annuities are long-term investments for retirement, so you may be charged an additional penalty if you take your money out early, if you’re not yet age 59½ (additional 10% tax penalty), or both. Annuities may fluctuate in value based on the performance of underlying investments or index, and can involve market risk, including possible loss of principal. All guarantees and protections are subject to the claims-paying ability of the issuing insurance company, so look for an insurance company that is highly rated and financially stable.
Control What You Can
Right now, the world is uncertain. But if you control what you can, you can prepare for better days ahead. Invest the time to find an adviser or financial professional who is the right fit for you and come up with a plan. Commit to a budget, make savings a habit, maximize tax deferral and manage risks and returns. While the pandemic continues to impact the economy and dominate the headlines, with these five tips, you can be on your way to a healthier financial future.
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