By Laura R. Knolle, MS, CFP®
Learn more about Laura on NerdWallet’s Ask an Advisor
Millennials will one day rule the world—but who is helping them rule their pocketbooks? Several recent studies have shown that many millennials are beginning to take on the world of investing, and it is our job as financial planning professionals to show them the way.
Over the last few years, our firm has employed several initiatives to help advise this young generation’s financial decisions. One is our “Next Gen Call-in Day,” where we invite our clients’ children and grandchildren to book complimentary half-hour phone sessions with our planners to ask their most burning financial questions. These are some of the questions we hear most often.
I have a new job with a retirement plan available. How do I start investing?
Congratulations! The fact that you’re already considering this aspect of adulthood puts you light years ahead of your peers. Our first recommendation is to join an employer’s retirement plan as soon as you become eligible—the sooner you can start saving, the better.
While your employer should provide you with some details on the retirement plan (i.e., contribution guidelines, company match and profit-sharing programs, etc.), you are likely to still have questions. Check with your employer to see what sort of educational resources and tools are offered. The company may also already have a financial advisor available to answer your questions. Your HR department can point you in the right direction.
I’m new to investing. How can I learn the basics?
It’s easy, if you know where to look! The Internet offers all sorts of free online resources, from right here at NerdWallet to sites such as Investopedia, Yahoo Finance, MSN Money and Mint.com. Many large brokerage firms also provide customers with access to digital “learning centers” to help you navigate the investment world.
The best way to learn something new is to immerse yourself in information. Try subscribing to a variety of financial magazines or check out what books and resources your local library has on investing.
If you’re looking to take your knowledge a step further, the Financial Planning Association holds several free Financial Planning Days throughout the year. At these events, professional financial planners volunteer to offer advice and insights to attendees, free of charge. To locate a Financial Planning Day in your area, check out www.financialplanningdays.org. You can also consider meeting with and hiring a certified financial planner. Many offer hourly work and have dedicated themselves to working in the best interest of their clients. Locate a CFP practitioner in your area by visiting letsmakeaplan.org.
How much cash do I need to set aside for emergencies?
Building up an emergency fund is extremely important. We suggest having at least six to 12 months of living expenses reserved for unexpected emergencies. If your car breaks down or you lose your job, this emergency fund is meant to provide you with a cushion and prevent you from tapping into any investment or retirement accounts. Doing so can lead to additional fees, taxes or penalties that can make a bad situation infinitely worse.
Start by calculating how much you need in living expenses each month, then set a savings goal for yourself: one month’s living expenses, three months’, six months’ and so on until you reach 12 months’ worth. Aim not to touch these funds unless a true emergency comes up. If you feel you may be tempted to spend your hard-earned money, set up a separate savings account so these funds aren’t mixed in with your day-to-day checking account. This is one instance where you’ll thank yourself for employing a “set it and forget it” mindset.
How do I pay off debt and still manage to save?
It’s tough! This is a balancing act and takes a solid plan of attack. First, make a list of all your debts (credit cards, car loan, student debt, etc.), including the balance, minimum payments and interest rates of each. This will help you gain a better understanding of your cash flow and determine your net income after taxes and living expenses. After making the minimum payments due each month for your debt obligations, do you have any left over?
Turn those surpluses into savings (and earnings!) by taking full advantage of your employer’s retirement plan match program, if applicable. You could be leaving “free” money on the table if you don’t contribute at least the minimum required to receive the employer contribution. Utilize your monthly surplus to increase your contributions in order to meet the match standards and make the most out of your retirement savings plan.
If your employer doesn’t offer a company match, it may make sense to use any surplus you have to pay off your debts more quickly, especially if you have high interest rates. You may find it helpful, and more motivating, to put all of your efforts into paying off one liability at a time. A good strategy is to start with the highest interest rate—the more you pay now, the less you’ll owe later. An alternative is to pay off the smallest balance first so you can feel good about scratching one off your list. Once that debt is paid off, start aggressively paying the next one and tackle each one until they are all paid in full.
Not running a surplus each month? Before you can start to pay down your debt and save, you’ll need to either increase your income (with a higher-paying job or a well-deserved raise) or decrease your living expenses. These moves are often difficult, but not impossible.
I’m a newlywed – can my spouse and I afford to buy our first home?
Buying your first home can be both exciting and scary. Before you dive into home ownership, here are a few things to consider:
- Do you make enough to support a mortgage payment? As a general guideline, a monthly mortgage payment (including principal, interest, real estate taxes and homeowners insurance) should not exceed 28% of your gross monthly income.
- Down payment. Nowadays, most lenders require a pretty substantial down payment before they will lend you the rest. This is not the time to dip into your emergency savings. You may need to employ a little extra discipline in order to save enough for a down payment without depleting your emergency stash.
- If your cash flow is tight because of other liabilities, or if you have high interest rates on the debt you owe, it may not make sense to incur even more debt with a mortgage. A good rule of thumb is that your total monthly debt obligation should not exceed 36% of your gross income.
- Are you ready? Home ownership is a big step that takes some serious commitment—financially, mentally and emotionally. There is a lot of hard work and ongoing maintenance involved, which can get costly. If you’re not 100% sure you’re ready, renting (and having a landlord available to fix any problems) may be a better option while you take the time to fully prepare.
Stepping into the world of investing and financial planning can seem like a daunting task, especially for millennials, who have seen market volatility. With the right guidance and support, any millennial can be well on the way into the next phase of adult life. Keep in mind that the sooner you start saving for your future, the further ahead you will be. Having a solid understanding of your finances and setting achievable goals is just the beginning. Find a professional planner that you connect with and trust; the rest should follow.