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How Millennials Can Ramp Up Their Savings

By Ellen Chang

July 18, 2019
Millennial woman checking her mobile bank account at a restaurant
Adopting the right financial strategies is the key to saving money and paying off debt, especially for millennials. (Photo credit): Gettyimages.com/RichVintage

Millennials should be saving even when paying down debt.

Millennials who are saddled with student loans and credit card debt are facing many roadblocks to saving money, but utilizing a handful of strategies can help them reach their goal.

Millennials have many obstacles when it comes to saving money because they are encountering higher costs of living, lack of wage growth and rising costs in higher education, said Michael Lai, a wealth manager at East West Bank.

The higher costs have left many millennials with few choices, and many have amassed more debt with increased usage of credit cards, which typically have higher interest rates, he added. Having the discipline to spend less money on discretionary items can be a challenge.

“Saving money doesn’t just happen,” said Greg McBride, chief financial analyst for Bankrate, a New York-based financial data and content company. “It requires a conscious decision not to spend today in order to be able to spend in the future and prioritizing saving above spending. The discipline needed is not an easy hurdle for many people to clear.”

One of the biggest behavioral biases that people succumb to is toward immediate gratification over delayed gratification, said Robert Johnson, a finance professor at Creighton University’s Heider College of Business in Omaha, Nebraska.

“It is very difficult for many people to imagine their future self and give up that vacation or new car today in lieu of having money to retire in the distant future,” he said.

Pay down and consolidate high-interest debt first

Whether you have student loans, car loans or credit card debt, paying down high-interest-rate debt first is a good strategy, Lai said.

Millennials downward economic crisis infographic

However, instead of waiting until their debt is paid off completely, Lai recommended that millennials should start putting aside some money with each paycheck. After establishing an emergency savings account, millennials should also invest their savings for retirement. Between emergency savings and retirement savings, millennials should aim to save 15 percent of their income, McBride said. Starting with 10 percent is a reasonable goal, but a larger amount will enhance your lifestyle in retirement, Johnson added.

“Do it right off the top by contributing to a workplace retirement plan and having a direct deposit into a savings account,” Johnson said. “If you’re not saving 10 percent of income, get there today! Then work on stepping that up until you get to 15 percent.”

“Pay off high-cost credit card debt pronto, but prioritize the saving of 15 percent of your income above paying off low-rate federal student loans,” McBride said. “Saving is all about the habit, and that habit must be established early. When you save, time is your greatest ally in growing that money, so an early start is essential. You can’t afford to wait 5-10 years until student loans are paid off before you start saving.”

Millennials should aim to have all their debt payments reduced to 20 percent of their overall net monthly income and leave the rest for household expenses and rent or mortgage, said Bruce McClary, spokesperson for the National Foundation for Credit Counseling, a Washington, D.C.-based nonprofit organization.

The amount of student loans is rising for many graduates. Consolidating or refinancing student loans to get a lower interest rate and more favorable terms can make it easier to manage payments while saving money, McClary added.

Consolidating federal student loans can be done for free and without a credit check through the Direct Consolidation Loan program. Private loan consolidation is available through a variety of lenders and will involve credit approval. The interest rates vary based on the lender and other conditions.

Cut down on luxuries

Millennials should consider some lifestyle adjustments to help make things favorable for an accelerated payoff. Placing a priority on paying your student loans faster is critical.

“These changes could include taking on extra work, making additional budget cuts or selling unwanted personal property to generate funds for extra loan payments,” McClary said. “It’s important to strive toward the shortest track for paying off student loan debt in order to save the most money over time, which can add up to quite a bit of savings when considering what current interest rates would cost over a 20-year timeline, versus paying them off in half that amount of time.”

Putting money in jars and saving it for the future
(Photo credit): Gettyimages.com/JGI/Jamie Grill
Between emergency savings and retirement savings, millennials should aim to save 15 percent of their income.

The standard repayment plans put federal student loan borrowers on a 10-year timeline toward repayment, but reality suggests that the target is somewhere closer to 20 years, which is the point at which any remaining federal student loan debt may be forgiven, depending on the program and if certain conditions are met.

“Focusing on the most realistic and sustainable pathway toward a 10-year payoff is the most ideal plan because of how much money is saved by not paying full interest over time,” McClary said.

Cutting back on expenses is the first step and an easier goal than finding a new job or going back to school to apply for higher paying jobs, said Lai. “A few strategies that they can adopt are to spend less of their discretionary income on luxuries,” he said. “Cutting out certain luxuries can go a long way.”

That was the method Rodney Martinez chose. Since 2015, Martinez, an engineer and designer at Rocket Dollar, an Austin-based self-directed individual retirement account and solo 401(k) provider, has been living with his cousin and her husband. After amassing $51,000 in debt from federal student loans, the 28-year-old was concerned he would be in debt for several decades.

“After finishing school and seeing the balance of my student loans, I was terrified,” he said.

He also chose to not buy a car right away and shared one with a family member until he could buy one for $10,000, allowing him to successfully pay it off within a year.

Martinez has been committed to being debt-free and saved money in various ways. His strategies included cooking at home and spending $160 a month instead of $500 on groceries and eating out. The money he saved went toward extra student loan payments.

“After budgeting, I quickly found that my highest expense was food and drinks,” he said.

The largest decisions he made were deciding to live with his family, cutting his expenses and “learning to be okay with missing out,” Martinez said. He says he has saved $30,000 in living expenses.

Experts recommend saving from 10-20 percent of your salary for a rainy-day fund and for retirement, while paying off your high-interest debt such as credit cards.

Martinez also found a side gig, and leveraged his knowledge and love of filmmaking, design and programming to make extra money. By spending his free time doing a few extra projects every month, he earned another $5,000 a year that he used for student loan payments and personal expenses such as travel.

“This also gave me the ability to build my portfolio and make great connections in my area,” he said.

Automate your savings as much as possible

There are a number of ways people can automate savings. “Utilize payroll deduction into a workplace retirement plan or 401(k) plan, direct deposit into a savings account and automatic bank transfers into an IRA,” McBride said.

A good rule of thumb to reach is to eventually save 20 percent and have 6-12 months of living expenses in case of emergencies, Lai said. “Everything else should be allocated to investments so that their money has an opportunity to outpace inflation,” he said.

A popular financial app that helps people save money and develop good money habits is called Acorns. You link Acorns to your debit card and it rounds the purchase up to the nearest dollar, “effectively allowing you to invest your spare change,” Johnson said.

“If your Starbucks coffee costs $4.16, when you use your debit card, $5 will be taken out of your account with $4.16 going to Starbucks and $0.84 going into your investment account,” he said. “This allows you to save money as you make everyday purchases, and you don’t have to make the decision to invest the money.”

Maintain your saving habits

The most common mistake many people make is to increase their spending when they pay off their debt, get a raise or get a new job.

“For instance, people move into a bigger apartment or buy a more expensive car or home to reward themselves for receiving the raise,” Johnson said. “What happens is they are unable to improve their financial condition because they spend everything they make.” Instead, people should save the money from the salary increase and “act as if you didn't receive the raise.”

Tired millennial woman sleeping after a day of shopping
(Photo credit): Gettyimages.com/Image Source
The most common mistake many people make is to increase their spending when they pay off their debt, get a raise or get a new job.

If a millennial received a $5,000 annual raise early in his/her career and invested that money annually into an investment account growing at a 10 percent annual rate, the total amount accumulated is over $822,000 in 30 years, Johnson said. The individual will have invested a total of $150,000 and have earned $672,000 from those investments, not including inflation and taxes.

“Continue to live the same lifestyle you led before receiving a raise and invest the difference,” he said.

Johnson says a 10 percent average annual return is realistic. Since 1926, the average annual return on a large capitalization stock index such as the S&P 500 has been approximately 10 percent, while investments in long-term government and long-term corporate bonds have on average grown annually by 5.5-5.9 percent, respectively, according to Ibbotson Associates.

“People would be well advised to pay heed to Warren Buffett's sage words: ‘Do not save what is left after spending; instead, spend what is left after saving,’” Johnson said.

Martinez prioritized paying off debt before building savings since he was living with family members. By July, he will have made his last student loan payment.

“The accrued interest of your student loans and credit card debt will demolish your savings and morale if you let it get out of hand,” Martinez said. “Give yourself a small cushion for regular expenses, and whatever you have left at the end of each pay period deposit it in your savings.”

While not everyone has the safety net of living with their parents or a family member, budgeting can help you reach that goal. Martinez said he became more aware of what he was spending money on by using the Mint app, which gave him a breakdown of his expenses each month and allows consumers to set budgets on categories such as groceries.

“You can't save money unless you first have an awareness of how you are spending money and what you're spending money on,” he said. “I would advise them to find roommates, preferably good friends they can live with, to cut down on living expenses.”

Many people become overwhelmed by the amount of debt they have and “get stuck in a loop,” Martinez said. “I think we all want to be living our best uninhibited lives, but it's unsustainable financially. Coming to that realization and making peace with it made saving money much easier.”

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