Debt problems for millennials abound and persist just as much as it does with other generations. Baby boomers now are more concerned if they have enough for retirement. They are close to that point in their life where they see retirement as a near possibility rather than a future event. Retirement is a concern for millennials but they also have a lot more on their plate.
One of the unique debt problems facing millennials is their student loans. It has been breaking records year on year and not in a good way. The average student that graduated in 2016 had an average student loan debt of more than $37,000 according to Forbes.com. This is not something that concerned the past generations as much as millennials do now.
Financial problems start to manifest when millennials are not well-equipped with the financial knowledge that they need to manage their funds. In fact, according to Financialeducatorscouncil.org, about 25% of adults in a recent survey they conducted opened up with the fact that they lack financial knowledge. This has led to losses of around $30,000 and that money could pretty much cover for most of that student loan debt.
There are some experts are suggesting that millennials need to look at the 5% threshold. This means that if their student loans have a 5% or lower rate, it might be best to consider investing while making the minimum payment. If the rate is more than 5% then it makes sense to pay down their college loans first to save money on interest payment.
The debt problems for millennials do not rest squarely on student loans. This is just part of it. Here are a few smart financial moves to consider for millennials. This may not solve all their financial problems but it would surely point them in the right direction.
Build up your reserve funds to face debt problems
More than anything, being prepared and proactive with your financial decisions can make a world of difference. In this case, having an adequate amount of reserve funds can help keep you away from getting deeper into debt. This is one of the first things to focus on for millennials as you start building a career.
PWC.com shares that from a recent survey, only about 24% of millennials have a good grasp of even the basics of financial management. That is a very low percentage which can lead to misguided financial decisions. This can, in turn, lead to debt and when unexpected emergencies happen, you can find yourself financially strapped.
Rather than taking out a loan just to cover for the emergency, you can use your reserve funds instead. The idea is to set aside an amount that can pay for your monthly expenses. You can start small like a $500 goal. Then increase it to $1000. Later on, you can start computing how much your monthly expenses are and start planning for those. The more you can cover your expenses, the better it would be. In case you lose a job or suffer any medical emergency, you get to maintain your budget for a few months.
Start with 401(k)
The golden rule with retirement planning is the earlier the better. The sooner you start saving up for it, the better your position is in the future to retire when you want to not when you need to. When you start talking about retirement, the 401(k) could be the first thing that comes to mind. This is true especially if you are working for a company.
The idea is to start saving up for a retirement with the 401(k) at work. This is convenient because it is automatically taken out of your paycheck even before you get your salary. Out of sight, out of mind and you are left with money you can use while your retirement fund is growing in the sidelines. You also get to make use of compound interest growing your nest egg even bigger.
Pay down high-interest debt
There are a lot of debt payment tips you will come across and one that makes a lot of sense is paying down high-interest debt. The simple fact of the matter is that you are losing money paying high-interest rates. You could actually use that money to save up for retirement, increase your reserve funds or even pay down other debt accounts.
This is the reason why millennials would benefit in prioritizing payment on their high-interest loans. One option you can look into is to take out a debt consolidation loan. This can greatly help you manage your debt problems a lot more effectively. Rather than having to juggle multiple accounts every month, you combine then under one payment.
Take on your student loans
One of the biggest debt problems millennials face is their student loans. This is actually unique to millennials as older generations did not have to deal with so much student loan amounts. Yes, they have school debt but not anywhere as close to what millennials are paying off. It is for this reason that paying it down makes a lot of sense.
Though student loans are worth it, it is best to focus on the payment if you can. As mentioned earlier, the higher the interest rate, the more millennials need to be aggressive with the payments. Again, debt consolidation can help manage and even lower down the interest rate for student loans. There are even instances when enrolling in an automatic payment with a lender warrants a reduction in the interest rate.
Increase your retirement savings
Bloomberg.com shares that about two-thirds of American consumers are not saving money into their 401(k). It has been emphasized early on how important it is to start early with retirement savings. The first step is to simply start. You need to make a commitment to putting a part of your salary to your 401(k) every month.
Once that is done, you are done with the first step. However, it doesn’t end there. The next thing millennials need to look into is increasing their retirement contribution. It needs to increase over time to make the most out of compound interest. It also helps if millennials are able to put in enough to take advantage of employer contribution. This is actually free money on the table and it is such a waste not to take advantage of it.
Save for a house downpayment with auto-debit
With the benefits of auto-debit for retirement and even student loan payments, it makes sense to consider it for house purchase as well. Millennials can look at auto transfer to achieve that same concept they have for their retirement funds. Before even buying a house, it is important to have enough money saved up for the downpayment on the house.
Automatic transfers can be set up so you can save a portion of your pay to go to an enrolled account. This can help you save enough funds for a downpayment on a house in a few years. The objective is to get that money out and in to that account so you do not use it for other unecessary purchases. As you become more serious in house hunting, you can firm up your numbers with how much you need.
Debt problems will always be part of life and millennials can overcome them with proper financial management.