We have had many discussions here on this blog about the importance of a financial plan—it is the key to financial freedom. Look anywhere on the net and you will see tons of articles and how-to tips to help you with your financial plan.
But, how do you create a financial plan that is relevant to today’s realities? For instance, we know the formula, right? Establish your financial goals. Create a realistic budget and stick to it. Save for retirement. Save for emergencies. Pay your bills on time. Control your spending and stay out of debt. Absolutely, this is THE formula for any financial plan.
However, how do you begin if you are a millennial with $20,000 or more in student loan debt? If you are unemployed or underemployed? Awash in credit card or mortgage debt? Are a member of the “sandwich generation” juggling kids and parents? Sometimes, when faced with the realities of life, it can be tempting to kick the financial planning and budgeting process down the road. You don’t want to do this. You just have to make that financial plan relevant to your life, to your reality.
We will begin today with the millennial generation.
A Millennial Financial Plan
According to all statistics, the average college student is graduating with around $20,000 in student loan debt. Depending on where you went to school, and for how many years, it could easily be three times this amount.
The job market is challenging and the starting salaries in most cases are barely enough to pay off student loans and other debt. For this reason, the percentage of young people returning to the family nest after graduation has increased exponentially. The costs of independent living are out of reach. How do you make a financial plan relevant to this reality?
Here are some key points to cover:
When you are just starting out, your canvas is enormous. In spite of debt burdens, you still have the luxury of dreaming large. Take the time to do some dreaming.
- What are your short and long-term life goals?
- How much will it cost to realize them?
- Set deadlines and benchmarks so you can monitor your progress and celebrate accomplishments.
- Entering the workforce already burdened with significant debt forces you to prioritize your financial plan toward debt reduction.
- Sit down and identify all loans, credit card bills and any other debt that you may be holding.
- Itemize the total due, interest rates, monthly payments, and due dates.
- Create an internal timeline for reaching zero debt. Your debt reduction strategy should focus first on the highest-interest debt.
- Work these monthly payments into your monthly budget.
Yes, you just graduated. However, the best time to prepare for retirement is now. The longer you wait, the bigger the bite from your monthly operating budget. And who says you have to wait decades to retire? The easiest way to begin your retirement savings is to enroll in your company’s 401(k) plan. If your company does not have a 401(k) plan, then contribute to an IRA. Try to maximize the allowable amount each year to either plan.
A fact of life is that no matter how much planning you do, the unexpected always shows up at the door. Particularly early in life, these unexpected guests can totally derail your financial plan. The antidote is to use this good time to sock away as much as possible into an emergency fund. Financial planners recommend an emergency fund equal to three to six months’ of your monthly cash flow.
If learning about money was not in your family paradigm, now is a good time to get up to speed. Your financial success depends upon your knowledge about debt, interest rates, fees, investment strategies, etc. When it comes to money, what you don’t know can hurt you.
- Read the fine print on all of your credit cards and be sure you understand all the consequences.
- Learn about the new world of financing. For example, the platform disrupting the financial world today is online lending. Almost no one is going to banks for loans. And if your credit is not excellent, the banks’ doors will be closed to you.
- The world of investment has also changed. Investment strategies can be aligned with your social responsibility priorities.