As the final flocks of millennials hang up their graduation robes and join the working world, their starting financial positions are more than a little disheartening. Right from the start, graduates are being thrusted into real-life tasks such as acquiring housing, healthcare, and childcare, all while paying off their ever-daunting student loans, which have more than doubled since the 1980s. Sure, this generation is fortunate enough to benefit from a 67% wage increase since 1970 but given that growth may be slowing in the expansion we have experienced since the end of the bear market in 2009, it’s going to take considerably more effort than simply working a few more hours or shifts to solve all their problems. Fortunately, though, it doesn’t have to be extremely difficult. Compared to previous generations, it is even more essential for millennials to understand the importance of savings, and to adopt a more conservative approach to saving, budgeting, and investing.
Despite the crushing weight of college debt, students graduating today were raised during the financial crisis in which many families lost homes, retirement accounts, and came to the realization that markets don’t always go up. As a result, they have learned a very important lesson: live below your means. In other words, if you are currently working a job for $50,000 a year, don’t plan on spending all of it at once. Create a budget of your fixed and variable expenses and include savings goals in your budget. Without the funds to cover variable or additional expenses, do not make those purchases, and absolutely do not use a credit card.
Recent college graduates know what it is like to live on minimum funds and still make the best of their lives as they juggle classes and their social lives that by the time they’ve graduated, it is second nature. Their cost-averse outlook, coupled with the knowledge of impending debt, has prepared them for the basics of learning how to properly set budgets and save.
One prime example of this mindset is international student, Madeline Parkinson. After graduating, she landed a position in Hong Kong as an editor, making $55,000 a year, or roughly $4,166 a month. With the cost of living skyrocketing along with housing costs, finding a proper balance between paying for rent, insurance, and other such expenses is essential for her. Although she spends most of her income on rent and insurance, she approaches budgeting with the popular “50/30/20” method, ensuring that she limits 50% of her income after tax to necessities, 30% to personal wants, and 20% to savings. Of those, three sections, however, what is perhaps most noteworthy is the savings account.
Before students can begin budgeting like Ms. Parkinson, they must first save like her. Putting aside 20% of their income each month, even when on a tight salary, can start to build up, and placing a good chunk of those funds towards savings and paying off student loans can alleviate a lot of stress by removing the guesswork from questions like “how much should I save this month?” or “is this Netflix account still worth it”? Of course, as they excel in their work and earn well-deserved raises, it is wise to stick to this rule. Despite the urge to spend more on personal wants as they earn more, the opposite is far more beneficial, and helps keep on track for maintaining and steadily chipping away at student debt. Through saving, living below their means, and investing through low cost index funds right from the start, millennials can gain an upper hand in quickly paying off their student loans and make excellent headway with setting themselves up for future financial success.