Smart money tips for Millennials
As a millennial, you enjoy advantages when investing: time and the power of compounding.
The investing maxim Rule of 72 clearly demonstrates the latter. Divide 72 by the long-term growth rate you expect to earn on your investments to estimate how many years you need for your money to double in value. For example, if you accumulate $5,000 in retirement savings by age 25 and expect to earn an average yearly return of 8%, your money may double in approximately nine years.
At 34, you may already have $10,000 saved for retirement – funds that can continue to grow for the next 30 years.
Brave the market. If like many millennials you're uncomfortable with the risk of the stock market, realize that investing can greatly help you save for retirement.
Stocks can also protect you from inflation. Cash savings lose purchasing power over long periods of even mild annual inflation; stocks don't. As a young-adult millennial, consider having at least 70% of your retirement accounts invested in stocks or equities.
Low-cost, target-date mutual funds can be great investment vehicles when you start to save for retirement. As you age, these funds automatically adjust how much of your investment resides in stocks.
Meet with a financial advisor to determine what asset allocation best suits your situation.
Use your workplace retirement account. A 401(k) is a valuable retirement savings tool that many companies offer as an employee benefit. It's convenient and painless: You fix a percentage of your pay to defer (save) directly out of your paycheck. After the initial setup, 401(k)s require little maintenance, and soon you won't even notice the money missing from your pay.
For 2015, investors younger than 50 can contribute up to $18,000 per year to an employer-sponsored plan. You sock away this money pre-tax, which means you pay tax on the contributions when you start taking distributions in retirement.
Typically, a Roth 401(k) works well for millennials because contributions are after-tax and, as long as you meet the criteria, your distributions in retirement are tax-free.
Don't overlook the plusses of 401(k) saving – your potential employer match, for one, which means your company matches a portion of what you kick in. At the very least, contribute enough of your salary required to receive the match. For example, if your employer matches one quarter of the first 6% contributed to the plan, contribute at least 6% of your salary to receive the full match.
Matching contributions are often subject to a vesting schedule. If you leave the company before you are fully vested, you forfeit some or all of the money your employer contributed (but not the money that you contributed to the account). Your employer may hold enrollment meetings to explain terms and conditions of your 401(k). If so, it's a good idea to attend.
Monitor your credit score. So you pay off credit cards and student loans and you pay all your bills on time? You still need to track your credit score.
Your credit score probably comes from Fair Isaac Corp., and takes into account such factors as your payment history, amounts you owe, the length of your credit history, your new credit and the type of credit you use. Your score falls between 300 and 850: Generally, above 750 denotes excellent credit, around 650 fair and less than 600 poor credit.
Federal law permits you three free credit reports each year from one of the major reporting bureaus:Equifax, Experian and TransUnion. You can obtain one report from a different agency every four months. Sign up for your report at AnnualCreditReport.com.
When you receive your report, ensure that all your information is correct – and hasn't fallen into crooks' hands. Verify the accounts and loans listed and look for signs of identity theft such as strange credit card charges, denials of credit, unfamiliar accounts and bills that arrive at unusual times. If any of the information appears suspicious, immediately contact the company that issued the report.
Did you finally reach your emergency fund savings goal? Start saving for your fantasy European vacation? While it sometimes requires sacrifices, a financial plan to reach your goals can bring you comfort and give you time to enjoy life.
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Cassandra Latsios is an associate consultantwith Wipfli Hewins Investment Advisors in Philadelphia. AdviceIQ is a USA TODAY content partner offering financial news and commentary. Its content is produced independently of USA TODAY.