We’re young and dumb. We don’t work hard. We’ve got it so easy, if only we knew. We expect technology to give us the easy way out. We struggle with the basics of communication. We lack common sense. We spend more than we earn. We’re dependent and entitled. How will we ever survive on our own?
Pretty much any article you read today on millennials will be littered with these accusations from prior generations. Fortunately, our grandparents said the same exact things about our parents. And if you talk with your grandparents, I bet their parents ridiculed them the same way. So either this belittlement is just a rite of passage, or we actually are getting softer and softer by the decade.
Debate the toughness/weakness, smarts/stupidity, talent/ineptitude all that you want; the one fact we can all agree on is that millennials are slower to develop than any generation before. For the first time since 1880, young adults from 18 to 34 years of age are more likely to live at home than on their own, according to Pew Research.
This has far-reaching effects, such as delayed earning power, delayed home ownership, delayed marriage and delayed family dynamics. This state of affairs then trickles down to economics, and how we guide millennials through financial planning.
Here are five tips I follow when advising this unique demographic:
1. Pay Yourself First
Once your millennial client has secured his first big-boy job, encourage this simple, but timeless mantra. Create a budget in which the young professional can aim to save 20% of gross income, broken down month-to-month or even weekly.
They’re going to want to spend this money they never had before. That’s fine, but only if they have prioritized responsibilities first.
Millennials are sadly misled as society has taken the liberty of redefining what’s necessary. The luxuries our parents or grandparents once splurged on are now considered the status quo. Like Ben Franklin once said, “Beware of expenses – a small leak will sink a great ship.”
2. Stay Liquid
If cash is king, it’s a deity for a young professional. I promote six months of income or expenses for my client’s “rainy day” emergency fund, or as I prefer a “sunny day” opportunity fund.
This is a goal that won’t be achieved overnight, so coach them to stay patient. If your millennial client really wants out of the house, let them know it’s okay to rent first. They can’t afford to become house rich, cash poor already. Your client should be able to walk away from the closing table with that cash cushion still intact.
3. Purchase Disability Insurance or “Income Insurance”
Protect their biggest asset! An individual true-own occupation policy with a non-cancellable/guaranteed renewable provision will cover your client’s skillset from illness or injury, and is portable as they move throughout their career.
Your client should also add some form of future increase options to lock in insurability at a young, healthy age with the ability to increase as their income rises. Also consider a student loan rider to protect their largest debt at this stage.
Lastly, make sure they are funding post-tax, to provide a tax-free indemnity should the unexpected occur.
4. Track Their FICO Score
Many millennials don’t know, moreover understand, what their credit score is. A solid number will tee up many of their future financial decisions.
Teach them to establish a credit history early. One of the best ways to do this is open up a personal credit card. They can begin showing a good habit by using this card every month, on a minimal basis, and zero the balance so as not to pay any interest.
It only takes a tank of gas or round of groceries to begin elevating this important number.
Remember that a lingering balances, minimum payments and the slippery slope of high-interest rates are all a result of a lack of liquidity and budgeting.
5. Take Advantage of Roth Options
The Roth IRA has been around since 1997 and has allowed advisors to eliminate one of the biggest uncertainties our clients can face, future income tax liabilities.
Millennial clients most likely can still contribute as their job may have not brought them over the income cap just yet ($118,000 for single filer and $186,000 for joint filers in 2017).
During the infancy of their career, it may be best to swallow the tax medicine today at a lower income, and allow those investments to grow tax-free the rest of the way. Pay taxes on the seeds, not the harvest.
Keep this in mind, as well: The Bureau of Labor Statistics points out that “employment of financial advisors is expected to increase 30% from 2014-2024, far more than average. To add to that, of the 300,000-plus financial advisors, less than 5% are currently under the age of 30.