For millennials, one of the largest sources of stress lies in our financial freedom and destiny. As of 2012 there were 92 million millennials  – the largest generation in our nation’s history. Today that number is around 79.8 million, according to Pew Research Center, still significantly larger than the baby boomer generation. And this massive cohort is fundamentally different from all prior generations – culturally, socially, politically, and you guessed it: economically & financially. Millennials are faced with unique opportunities as technology savvy, digital natives and early adopters of social media but also unprecedented challenges. While mean income for millennials steadily declines, the average student loan balances for millennials have continued to sky-rocket.
In a highly competitive and globally connected market where immigrants are driving workforce growth in the U.S., jobs are becoming harder to find and have contributed to a shift in the timing of particular life events like getting married, buying a house and getting the hell out of mom and dad’s basement. For the first time in 130 years, young adults are more likely to be living in their parents home than in any other living arrangement .
Today, financial freedom and retirement are less a promise than they’ve ever been. Many of us will be working longer and harder for it. But performing our best today – mentally, physically, emotionally and economically means being 100% present in the here and now. Financial distractions create a ton of noise and stress – but they’re clearly a necessary evil. So how do we go about reducing some of the noise and more efficiently and responsibly simplifying financial decisions for millennials?
It starts with understanding that the financial planning picture for most millennials is extravagantly less complex than that of a married couple with joint considerations, multiple dependents, 529 college savings plans, massive tax considerations including tax-loss harvesting, real assets including a home with a mortgage, multiple boats or cars, and the the list of complexities grows drastically for the high and ultra-high-net-worth.
Now, to our fellow millennials, please don’t take offense. We know that you are all “H-E-N-R-Y-S” : high expected earnings, not rich yet. But that’s the point -most millennials are not rich yet or at a position to require complex estate planning and tax considerations for which most, but not all, would like (require) a financial advisor. It’s similar to a reverse mortgage or a business loan for a small but growth oriented company – the deal/requirements get more complex as time goes on.
The point of explaining the relative complexity of a millennial’s financial planning landscape is to segway into the importance of “automation”. Don’t get excited and think this post is going to turn into Artificial Intelligence, Machine Learning and how robots are going to take over job force. While that’s interesting, it’s 100% out of our lane. So why is automation important? Because it’s a huge financial success factor for most people today, not just millennials. Your finances should not be about emotions, and where possible, the best option is to remove as much human emotion and judgment from your financial decisions. Hence why, along with digital adoption, we’ve seen the rise of automated investment advice platforms (aka “robo-advisors”) like Betterment, Wealthfront, Personal Capital, etc. Removing that decision making does two things simultaneously: 1) reduces stress and improves financial progress & stability automatically; 2) eliminates tons of research and guessing games or unneeded conversations with finacnial professionals, freeing up your time and mental bandwidth for those benefit generating activities mentioned earlier. For more on the psychology of automation in finance, check out Tim Ferriss’ piece with Ramit Sethi – Psychology of Automation.
So in order of importance, here are the five things millennials should know and do to alleviate some of their financial stress, feel better about the future and shift focus to today’s benefit generating activities…
1. Adopt a Goals-Based Perspective – one of the biggest trends emerging over the last five or so years in wealth management has been the concept of “Goals Based Wealth Management” (GBWM). The number one thing you need to understand is that traditional financial or investment performance has been tracked and benchmarked relative to the market. “Oh, great, my portfolio is up 4% over the DOW so far this year”. While that’s a positive indicator, that doesn’t necessarily mean your on track for reaching your goals…you know, the whole reason why you’re investing in the first place? So what GBWM does is eliminate the chatter about how you’re tracking against the market or an index, and puts your goals at the forefront of the conversation. Because financial planning, wealth management and ultimately your savings & investment goals are a lifecyle – they need to be viewed in that manner and over the long term. Think quickly about some of your biggest life events…college savings, buying a car, buying a house, a wedding ring, planning a wedding, retirement. And those are just the bare-essentials for most people. Wouldn’t you also like to go on a cool trip, buy a new computer, move to a new city, etc? The great thing about adopting a goals-based perspective is that with today’s technology, you don’t need a financial advisor for this goals-based conversation: it fits nicely into the construct of automation…
2. Automate Decision Making – as mentioned before, millennials have a much simpler financial landscape. And even those who are ahead of the curve financially can automate most financial decisions. After you complete #4 (open two bank/savings accounts) you can have your employer automatically send your paychecks to two separate bank accounts via direct deposit. Your 401(k) or IRA, which is typically employer distributed, will automatically come out of your wages. If it’s not, then you absolutely need to set up a retirement account and start auto-contributing because despite high levels of student debt paying yourself first is crucial. Next, automate your student loan payments (how much to allocate is an individualized question). Once you’ve defined some of your near and long term financial goals via a GBWM framework, you can open an account with one of the popular robo-advisors and start automatically contributing funds towards those goals on a weekly, monthly, bi-monthly, or annual basis. Robo-advisors like Betterment, Wealthfront and Personal Capital do a great job allowing you to select a goal (major purchase, emergency savings, retirement, college savings, etc.) that is lifecycle oriented, input your risk tolerance via a direct question or series of questions, link one of your bank accounts and then boom your contributing to a goal. Your asset allocation is presented to you and after you accept the investment proposal you are automatically invested. Dividends are automatically reinvested. Account alerts, statements and tax forms are automatically delivered electronically. Pretty efficient, right?
3. Focus on Credit Score – once you’ve automated the majority of your major expenses, retirement and any savings or investments most millennials won’t have too much cash on the sidelines to pay down large credit card balances. Avoid emotional spending habits, cut down on your “fun” budget and absolutely shift toward a reliance on cash over credit. Building your credit is wildly important for major purchases and life events or goals-based plans down the road so establish a rock solid credit presence and maintain it. Ideally by, you guessed it, automating the payment of your entire balance or at least the minimum payment.
4. Open A Second Bank (Savings) Account – some of us are late to the game on this one because it seems so simple. Whether you’re opening up a savings account with the same institution where you have your checking account; at a separate institution; or opening up a growth oriented account so your savings are working for you (check out Betterment’s Safety Net and Build Wealth goals in their Goals and Advice page) it’s important to separate your funds. One account, typically your checking account, is funded by your employer via direct deposit and used to fund your second (savings) account, fixed costs like rent or mortgage and food, or credit card expenses. You can also keep two completely separate checking or savings accounts and have 50-70% sent of your income sent one for fixed costs and major expenses, and the other 30-50% of your income sent the other account for savings, investments or discretionary spending. Either way, you have options to segregate your income and automate the entire process.
5. Finally, Keep It Simple – hopefully this theme has already come across. Over the years, the transparency and use of technology in banking & finance have grown rapidly. It’s helped knock down old barriers to entry that existed for every day folks to fully understand investing, saving and to take control over it. It’s also made it extremely hard to leverage the market as a betting grounds for quick money or getting rich…almost impossible to do as an individual. So for millennials: keep it simple, invest diligently and for the long haul, and most importantly, automate things now before your financial situation grow (hopefully) increasingly complex.