Did you know today is 401K day? Probably not because most likely you are a normal person who may not spend their day thinking about 401Ks, though it wouldn’t be the worst thing in the world if you did. According to a recent report from Morning Consult, only 39% of adults who are saving for retirement started in their 20s, plus half of adults between 18 and 34 have not saved anything for retirement. This does not bode well considering that the average American thinks you should have saved $1.7 million by age 65 according to recent survey from Charles Schwab.
Now it could be attributed to laziness but a safer bet may be cluelessness. Financial education is lacking in this country and so a 401K can be daunting to many young adults. A new survey by MagnifyMoney found that almost one in five Americans don’t contribute enough to their employee-sponsored 401K plans to earn the company match. But interestingly, though we have blamed Millennials for the downfall of beloved brands, the real estate market, the concept of cooking and basic manners there is a lot of confusion surrounding what they do with their money as well. This generation has actually more saved in their 401K than any other and balances are on the rise, according to new data from Fidelity.
To clear up everything on 401ks and how much you should be saving as well as Millennial financial habits best-selling author and personal wealth expert, Farnoosh Torabi spoke with Ladders.
What do you think are the biggest myths people have about Millennials and how they approach their finances?
“I think that there is an assumption that since many in the Millennial generation are burdened by student loan debt and stagnant wages, that they may not be as financially savvy as previous generations or even have the same big financial goals such as buying a house or investing for retirement. I think this a big myth. While their financial obligations may be slowing down their ability to get ahead, they’re still optimistic about their ability to achieve financial goals. And they’re managing to save money at a rate that exceeds that of Gen X and Boomers, according to a Nerdwallet analysis.”
How can Millennials get better about saving for retirement? Basically, what do they need to know about their 401Ks?
“The 401K is an unparalleled savings vehicle that allows you to contribute directly and automatically from each paycheck (taking the ‘work’ out of saving). I would encourage Millennials to invest as soon as possible. A little bit of savings can go a very long way, thanks to compounding. Even investing $10 a day in a 401K – over the next 30 or more years – can yield hundreds of thousands of dollars. If you have access to a workplace retirement account like a 401(k) that provides a match from your employer, at least invest enough to earn the full match. That’s free money and a great way to accelerate retirement savings.”
What are your top 5 strategies to save for big purchases like a house or a car?
Research and have a plan. The first step should involve doing your homework, surveying the market and understanding what sort of the desired outcome you want in affording this purchase.
Set a budget. For housing, it’s recommended that we limit our monthly expense to no more than 30% of gross income. For car payments, experts tend to recommend a 15% monthly limit.
Get support. You don’t have to go it alone, nor is it recommended, especially when making a big purchase such as a house. Tapping the support of an experienced real estate agent can help you navigate the overwhelm of a home purchase and understand the market and all the related financial costs. I’ve recently partnered with Realogy, the full service residential real estate services company whose brands include Century 21, Coldwell Banker and Sotheby’s International Realty, in its national rollout of a solution called TurnKey that is helping to simplify the home buying process. Homebuyers who close on a home through a TurnKey agent can receive complimentary Amazon Move-In Benefits, including $1,000 to $5,000 of smart home products and Amazon Home Services, things like deep cleaning and hanging up a heavy flat-screen TV.
Save cash. Cash is king when you’re in the market to make a big purchase. The more you have in the bank, the more options you will have on hand. For a home purchase, you’ll typically need about 10 to 20% for a downpayment.
Boost your credit score. Your credit score can help you save money on a big purchase if you plan to finance it with a loan. The higher your credit score, the better interest rate you can earn on the loan, which, in turn, reduces your monthly payments. Pay attention to your score and if it’s not in the 700s (out of 850), then focus on strengthening your credit health by making timely debt payments and knocking down your debt balances.
What are your best tips for sticking to a budget?
“Make sure your budget is closely aligned with your goals and personal interests. Take time to figure out where you want to be in the next year, whether it’s to save up for a house downpayment or erase your credit card debt. Use that goal to fuel your budget’s purpose. Next, leverage technology such as free budgeting and savings apps to keep you on track. And finally, think of your budget as a spending plan, too, which can minimize the feeling that you’re depriving yourself.”
Social media has a huge influence on how millennials spend. Do you have any tips for not letting that have as much power over you?
Mute certain accounts that are leaving you feeling less than or creating FOMO.
Stay offline in the evenings. We tend to do a lot of online shopping between coming home and going to bed, so, if you’re having one of those days and feel like you need a quick shopping fix, instead plan a night with friends or go for a workout.
Clear your browser data and history. In most cases, the option is found under Settings, then Tools, with the choice to clear your browser data. Many browsers feature a “private” mode, where any online activity won’t be tracked.
Unsubscribe from marketing emails. Avoid getting more emails that will encourage you to spend.
Is there a certain financial checklist you should have for each decade of your life before retirement? Who can help people build those?
20s. If you have student loans and credit card debt, be sure to develop a debt repayment plan as soon as possible. If you need support, the National Foundation for Credit Counseling is a great resource (NFCC.org). I would also suggest looking into federal student loan repayment programs that offer some relief such as Income-Based Repayment (ibrinfo.gov). During these years, pay close attention to your credit score, too, so that if you want to borrow for the purposes of buying a home or a car, you can qualify for the best loans. This is also a great time in life to set up automatic transfers to your savings and 401k. To beat stagnant wages, I’d also recommend finding a side hustle or additional part-time revenue stream.
30s and 40s. For many, the 30s and 40s are a time for getting married or family planning. Your late 30s and 40s are also typically the peak earning years, so you may feel as though you have more money to “work with” and allocate towards investing, buying a home, saving for their children’s college and other goals. It’s helpful to accelerate savings during this time frame to meet those goals and establish an estate plan which includes a will, life insurance and other protections.
50s and beyond. For those in their 50s and approaching retirement, I think one of the most important financial moves is to pay close attention to one’s health. Eating right, exercising and regular doctor visits is recommended during all life stages, but especially important in the later years, as a way to prevent or manage an illness and minimize medical expenses. During this time, I’d also recommend focusing on paying down any outstanding debt, such as a mortgage or car loan, as it’s ideal to enter retirement debt-free.