I’ve heard about fellow millennials taking an extended leave of absence from the workforce or a sabbatical to travel and take time to gain experience outside the workplace and/or reenergize themselves. I, like any other hard-working millennial can understand how appealing this may seem. If you are considering taking a sabbatical or taking an extended time off to retune your career/life path, I’d recommend knowing all the risks associated with doing so.
First off, the most obvious risk is the loss of income in the face of continued expenses. Even if you live frugally during your time off or travel to a country/region that proves to be a cheap travel destination, you will continue to incur expenses. Those expenses won’t be offset with an income and even if you have budgeted properly, we all know unexpected expenses can arise at any time (and often the most inopportune one!). So, while I normally suggest having at least 3-6 months of your salary in a savings account for those unexpected type of costs – the fact that you have no immediate income to replenish that ‘emergency fund’ would make me caution anyone that they should have a larger amount set aside as an extra cushion in any type of scenario where they are preparing to leave the workforce.
Another big factor one should think about is the loss of compounding interest and potential savings. Loss of contributions to a qualified account such as a 401(k) can be pretty significant, even though it may seem trivial at first. For example, if a millennial has a 6-month window where they aren’t working and would have contributed roughly $1,500 to their 401(k) ($250 a month), they will lose the immense benefits of compounding interest and time on that investment; at a hypothetical 7% compounding rate, $1,500 can grow to over $22,000 in 40 years. You can see that the amount of initial lost savings in the scenario above isn’t actually that great and the assumed time off isn’t that long either – further illuminating how powerful compounding interest and qualified savings can be. This fact should not be taken lightly.
It also goes without saying that one needs to consider your financial burdens in making such a decision. In today’s world, the financial burdens (student loans, debt, etc.) are great and the cost of living continues to increase. As millennials, we need to diligently think through every decision we make when it comes to our careers. While we are young and we do have a long-time span to make career changes and risky decisions, it is important to understand all of the potential downsides that come along with those decisions.
One should also keep in mind that taking time off is time you aren’t building your career to advance in position or achieve professional goals. Also, there are no guarantees of employment when you decide to come back into the workforce. The risk of not being able to find a job when one decides to re-enter the workforce is always something young people should think about. As an advisor, I’d make sure my clients or any of my peers who take an extended leave from the workforce strongly consider these risks.
In closing, I’d say that generally, millennials are working hard. In my experience, with both clients and millennials I know (generally, these people would be considered affluent), I have not seen anyone taking a long time off between jobs. To me, it seems that with all the financial burdens and competition to get ahead in today’s workplace environment, millennials are working hard to advance their careers and personal situations. I have also seen a lot of supporting data that shows millennials are just as hard working as Baby Boomers. So, whatever you ultimately decide to do, from taking a break or continuing to hustle, it is important to know how your decisions will impact both your life and your professional path.
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As a millennial, my most formative memories of the financial markets center around the Great Recession. I remember waking up to markets in turmoil in February 2008. I also have earlier memories of Enron going under and I watched Madoff’s Ponzi scheme go up in flames – all these events and many more in recent memory caused significant damage to the public’s trust of the markets. Specifically, these events formulated my own distrust of the market and a reluctance in me to trust institutions. So, you may ask, why am I bringing these events and my own cynicism of the financial world up when I now work as an investment advisor and strategist at an RIA? It’s because as a millennial, today’s markets create a sense of uneasiness in both me and others I have spoken to. As a millennial, I find myself with a ‘this is too good to be true’ mentality when looking at a strong market, considering the integrity of any good market run. I always question if the run can last, and for how long. However, as young earners and budding savers, we should put aside our reluctance to buy into a frothy market and instead consider the bigger picture.
Skepticism of the markets is in many ways good. It is prudent to question and plan for any type of prolonged downturn. However, if skepticism keeps you from properly saving by investing into the market, then that cynicism is problematic for your future. Over time, markets trend upwards. Even after a period of a prolonged pullback such as the Great Recession, the markets have recovered and then some. Investors who didn’t panic and held their investments through that period have benefitted greatly and continue to do so today. Investing in equities is necessary for savers to both grow their savings and fight against inflation. Many millennials lose sight of this fact because they haven’t been earning and saving for a significant amount of time, and inflation is currently below trend. However, I like to remind my peers that a postage stamp cost 13 cents in 1977. Today, a stamp costs 49 cents. Stamp prices are driven purely by inflation. This is indicative of how buying power dwindles over a long period of time – and means that the money that you earn today will be worth significantly less in 30 years. Investing in equities and realizing the price appreciation over a long period of time will help savers in becoming financially secure in their futures. So, being fearful and cynical of the market, will ultimately prove costly for those individuals who choose to stay on the sidelines.
I’ve also heard people saying that they are waiting for a pullback to buy into the market. While this may sound like a good idea, since the market is currently only climbing higher and higher to new record levels, market timing always proves to be a loser’s game. While you may time a buy or sell and get lucky every now and then, over the long term you will ultimately buy/sell on the wrong side of the trade as well. I suggest dollar cost averaging into the market, thus taking away the timing component and any potential greed or fear that may come into play. Staying disciplined and keeping your eye on the big picture – the long-term investing horizon – is key in successfully investing and growing your savings. By getting into the market and holding quality investments over a long period of time, you will ultimately benefit yourself and properly position yourself for a successful financial future. If you sit on the sidelines waiting for a pullback, you could be like many investors throughout the last year, continually waiting – and ultimately missing out on the growth of the market and still sitting in cash.
In closing, I understand all the factors that can make my fellow peers hesitant to pull the trigger and get into the market. Times are uncertain and the market’s climb seems out of sync with the constant irregularity of the geopolitical landscape. However, keep this one fact in mind: markets always grow over long periods of time, regardless of any corrections, pullbacks or recessions that occur in the interim. As a generation, we have a lot to be cynical about, but the same basic financial principles that have existed for decades still apply to us. We need to save for our futures and we need our savings to grow to help us achieve our goals and find financial security. If you aren’t investing a portion of your savings yet, (whether it be in a qualified account like a 401(k) or IRA, or in an individual savings account) it’s time to ask yourself: what are you waiting for?
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As the recipient of a federal tax refund last week, I like many others, began to think – what do I do with this money? My first inclination was towards those that appeal to me most: spending a portion of it on a night out. However, my responsible financial advisor mind kicked in and I started to think about all the other ways I and my other millennial peers should use this money for their long-term benefit instead of short-term thrills.
Use the money to pay down debt. This is the first rule of thumb at our firm and for many financial advisors. A report from The Institute of College Access and Success found that the average undergraduate has $30,100 in student loan debt. If you just received a tax refund – aka money you had planned to live without – this should be your first move. Paying down your debt faster will benefit you enormously over the long term and leave you with more money to spend down the line when you are likely to have higher expenses. If you have college debt, applying excess payments against higher-interest loans from private lenders should be a no-brainer.
Build an emergency fund. Keeping up with the costs of life can be difficult. However, time and time again I am surprised to hear that my peers don’t have an emergency fund ready for unexpected costs that could come up. Typically, we advise that an emergency fund be equal to at least three months’ salary and that it be available to you in a liquid savings account. In the unfortunate event that an emergency comes up, be it a medical expense, loss of job or even an unexpected home expense, you will be happy that you have this cushion to support you.
Contribute to a Roth IRA. In addition to employer sponsored 401(k) plans, most millennials would benefit from contributing to a Roth IRA. I imagine most millennials haven’t stashed away enough money this year or last in their qualified accounts due the other various costs they have (debt, living expenses etc.) so, now may be a good time to try to catch up. The Roth option is especially beneficial to young people, who will most likely see pay increases throughout their professional careers. In fact, CNBC highlighted a Fidelity analysis showing that a 25-year-old could generate $1,000 in monthly retirement income by contributing just $160 a month (assuming a 5.5 percent annual return). A 35-year-old just starting out would need to save $270 a month to achieve the same goal, and a 45-year-old would need to contribute $500. So, any amount that you can put aside into a qualified account will benefit you greatly later in life.
If you are already set on all of the items above, then go ahead, have fun – travel or spend some of that money on hobbies/interests. I know my suggestions above aren’t nearly as exciting as the initial knee jerk thoughts you may have about what to do with your money. However, allowing debt to accrue, being caught with your pants down in the case of an emergency or not having the proper savings for retirement (a long way down the road) will prove much more painful than using this money strategically.
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The Millennial generation has been at the forefront of the surge in sharing everything from rides to clothes for both convenience and financial reasons. Taking Ubers on occasion can sometimes be less costly than owning a car you may not use very often, or living with roommates can help cut down the cost of living. But at a certain point, it's important for individuals to do the math and see if it makes financial sense after all to consider a big-ticket purchase.
Let's look at the pros and cons of a home purchase first. When first considering the purchase of a house or condominium, you need to look at your situation and determine whether or not your life, career and the place in which you are currently living or thinking about living are stable. Make sure to the extent that you can that you have strong job security (obviously unforeseen circumstances can arise), you are more or less satisfied with your lifestyle, and you are happy with where you live and don’t plan to move across the country.
If you can find a mortgage for a place that is suitable for roughly the same amount as your current rent or less, then the transaction makes sense. I counsel my clients that the general rule is 25% of your net salary can be allocated to your home and mortgage expenses without having the fear of becoming "house poor." Make sure that you're also factoring in condo or HSA fees (if they apply) as well as municipal taxes. Also, keep in mind that a real estate investment, like any other investment, has inherent risks. Always complete the proper due diligence before any purchase.
The decision to use ride-sharing services exclusively or purchase a car fluctuates more based on where the person lives and what shared transportation options (like Uber or Car2Go) are available. In addition, different urban areas create very different circumstances. For example, DC, where I live, is a condensed and compact city where one can either walk or take a shared ride to and from destinations for a relatively low cost. In a city like Miami, Los Angeles or Houston, where the urban area is very spread out and not as walkable, ride sharing would quickly take a heavier toll on your wallet. Of course, these assumptions aren't black and white, as people's lifestyles and commutes can vary, making the need for a car more or less necessary.
Generally, though, I tell my clients that in a world where more and more cheap ride share options are becoming available, a car purchase can be pushed out further. A car is a hefty cost in most cases, and paying for the car, gas, insurance, repairs and parking becomes very expensive. A car is also a depreciating asset, meaning you will rarely recover anything close to what you paid for it. (Your house, however, generally should appreciate in value.) So, if you can live your life through ride sharing and public transport comfortably, I recommend going forth as such.
Regardless of what you choose, check in periodically on pricing and compare your options. Changing life circumstances or new choices in the market may influence your decision. In general, it’s always a good idea to have a solid understanding of your financial situation so you can assess if you can change your living situation, lifestyle, or retirement plans.
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As most people know, Millennials are facing a student loan debt crisis. A recent Lending Tree study found that Millennials born between 1980 and 1995 owe an average of $27,162 on their student loans. Prudent individuals will want to start making payments on their debt as soon as possible, but they often wonder if they should instead be putting that money away in savings, particularly in a 401(k) plan. This is very understandable given that longer lifespans, uncertainty around Social Security and the increased cost of living are impactful reminders that a comfortable retirement will be expensive. However, I counsel my Millennial clients that the general rule of thumb is to pay down debt - including student loans - first.
It can be difficult to know where to start, especially if you have multiple loans. Paying down high interest bearing debt (typically private loans) should be your priority. Federal loans, which bear less interest and are typically more forgiving, can follow.
Now, if you only have non-interest bearing loans to pay off and you are keeping up with your loan payments, you could start to think about diverting some of your earnings to retirement savings (while keeping up with your regular loan payments, of course.) I recommend doing this when your company has a 401(k) plan that pays a match and you have enough capital to take full advantage of it. But again, if you have high interest-bearing debt, paying down these loans in their entirety should be your priority.
Once the burden of mapping out a plan to pay down your student loans is off your shoulders, you should determine your strategy to save for retirement. If you have waited to save for retirement because you couldn’t afford to put any money aside, you should consider contributing more to try to catch up. If you haven’t been able to save for the first three or four years of your career, for example, you’ve lost out on the compounding effects of time over that period. Contributing an additional 2-3% to a company plan or more to your personal IRA will help put you back in the right direction. Remember -- it’s never too late to start saving for retirement.
Now that you've sorted out your plan for tackling student loan debt and retirement savings, don't forget to start thinking about building up an emergency fund, too. I recommend having a savings equal to at least three to six months' salary set aside in a liquid savings account for unexpected expenses like a trip to the ER or car repair.
As a fellow Millennial myself, I know that making these types of money decisions can be overwhelming, but try to stay calm and be patient. Your relatively young age is definitely a plus. If you stick to a smart and strategic plan, you'll be well on your way to a solid financial future.
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