05 Aug Money habits for Millennials: a 5 step plan
The front runners of the oft-maligned Millennial Generation (born between 1981 and 1996) are turning 40 this year, can you believe it?
As a Millennial you may have heard yourself labeled materialistic, entitled, spoilt. Yet you’ve navigated several world-changing events at key stages of your life — the chaos of 9/11 as a young teen; the global financial crisis of 2008 as a young adult and now, as your career should be blossoming, the Covid-19 pandemic, proffering the most uncertain economic future for any generation since the Great Depression.
It’s no surprise that of affluent Millennials surveyed by Investopedia, nearly half felt they would be forced to continue working beyond the typical retirement age of 65.
They showed low financial confidence and surprisingly cautious investment tendencies (despite having a longer timeframe to invest).
They were significantly less likely to own equities (shares) compared to the previous generation (Gen X) and more likely to allocate their savings between cash and bonds.
On the other hand, Millennials surveyed trusted financial advisors more than previous generations and relied on multiple sources such as books and podcasts to get their financial education.
So, what’s the key to getting ahead financially as a Millennial?
Creating solid money habits is the crux of improving the chances of achieving your long-term financial goals and objectives.
Step 1: create an emergency reserve fund (because you know from experience that having a safety net is vital in the face of economic uncertainty). Build up a stash that covers your fixed expenses for 3 – 6 months.
Once that’s done, it’s time for the next step, because sitting with too much cash on hand is also not the best long-term strategy.
Step 2: set up a retirement saving strategy and allocate a portion of your income to a retirement investment. This a tax-friendly investment vehicle (tax-friendly investment means SARS contributes to your retirement plans) and it also ensures that you consistently put capital towards your retirement plans.
Once you’ve harnessed the power of the Taxman as much as you can, it’s time to turn your mind to spreading your risk.
Step 3: invest in a diversified worldwide portfolio. Based on our client experience at Netto, we’ve noted that South African Millennials often live and work abroad for periods of time and don’t necessarily want to only invest in South African assets. This makes good sense — spreading your investments across global markets and currencies means you’ll never have all your financial eggs in one basket when things get volatile (as they assuredly will).
Step 4: stay invested for the long term. Sadly, your Millennial-ness means you’re accustomed to rude financial system shocks, so it’s tempting to try and time the markets — buy in when prices are low, and sell out when they get high. Sounds simple, right? The problem is, financial research shows that acting on this instinct actually impoverishes the average investor. Turns out, the markets are too efficient for us when it comes to pricing in information, and by the time we take action, prices have already reacted. We end up buying high and selling low — the very opposite of what we need.
So, we have a reserve fund, a tax-harnessing retirement investment and a diversified worldwide portfolio. What’s left?
Step 5: — avoid lifestyle inflation
When your income increases, it’s so tempting to increase your spending. You work hard— surely you’ve earned the right to play hard, too? But what could happen if you don’t spend all your increases? When instead you allocate a portion of your increased disposable income towards boosting your investments savings, you accelerate your progress towards the financial stability you’re aiming for.
What’s your Next Step?
Staying on track for the long-haul is easier with accountability and an objective sounding board. Working with a Certified Financial Planner (CFP) to co-create your own sound financial plan gives you the greatest likelihood of staying the course successfully to manage what is likely the most significant long-term project you’ll ever take on: steering yourself to financial independence on your own terms.