Millennials starting on their financial planning have some tough decisions to make.
- Do they start saving for retirement, or pay down student loan debt?
- Do they save $1,000 for an initial emergency fund, or get aggressive and shoot for 3-6 months of expenses?
- Do they contribute enough for the employer 401k match, or go above and beyond? What about a Roth IRA?
The answers to these questions, like everything in financial planning, are not cut and dry; however, there is plenty of generic advice available from financial entertainers on TV and radio–I call them financial entertainers because they are not advisors. Their recommendations are based on minimal information from callers and writers, and not off in-depth conversations. Rarely will advice given on a radio, or television show fit your personal situation. Rather than follow the advice of a financial entertainer, Millennials (really, everyone) should strive to find a financial advisor who will take the time to learn about their personal situation and develop a personalized plan for them.
Let me give you an example where a personalized financial plan, which went against the general advice given on a radio show, provided more than financial security–it also provided piece of mind.
The clients: A Millennial couple, both employed at the time of beginning to work together over a year ago.
- Family situation: No kids, only fur babies.
- Debt: Not unlike any other Millennials- student loans, a car loan, and a mortgage.
- Assets: A little in the bank, and the beginning of a 401k to receive a company match for one; the other had no employer retirement plan.
- Insurance: No life insurance. Health insurance through employer.
- Discretionary income: Very good with their budget, leaving about $1,000 month to apply towards planning goals, with expectations of income increasing in the upcoming years.
- Client’s goals prior to initial meeting with advisor: Save a little more into savings, and pay down student loan debt as quickly as possible, and then work on other goals. They heard this from a financial entertainer.
After our initial planning meeting, a plan was developed to address multiple goals at the same time. Term life insurance was recommended, and purchased. A savings plan was developed to 1.) build 6 months of monthly income need, 2.) receive employer match in 401(k), 3.) fund $250 a month into Roth IRAs for each, and 4.) pay down student loan debts aggressively (aka: more than minimum payments).
To their credit, they did everything they were asked to do, and more, which became a huge benefit for them. Recently, in our annual review, my clients informed me they had decided that one of them was going to go back to school, which would require leaving their full time job. The soon-to-be student would find a part-time job while completing the program to replace some of the income they would lose. We tweaked their financial plan by reducing Roth IRA contributions and slowing down student loan payments to create more monthly income to replace the lost income. They’d be able to maintain their quality of living, continue to make progress toward their goals, albeit at a slower pace, and complete the schooling to allow the desired career change. We all left the meeting feeling good about the upcoming year and the amended plan…here comes the curveball. Less than a week after our meeting, the other spouse’s small tech company downsized, leaving them without a job.
Let’s recap: Young couple with an aggressive saving and debt paying plan has a career change reducing their income, followed by an unexpected loss of job. Income went from a lot to a little…real quick. Time to panic, right?
Well, not quite. Because of our planning and their discipline to follow the plan, my clients had 6 months of bills set aside in savings. It’s no fun to see an emergency fund go down, but that’s why it is there; it will help them bridge the gap until they begin bringing in income again, and it can always be rebuilt. The additional payments made on their student loans over the last year allow them to not have to make any loan payments until 2018, creating more breathing room as they search for the next job opportunity. Rather than being stressed about money, starting school with a part time job and having to find a new full time job, my clients are able to breathe a little easier because of their personalized plan.
Had we never met to develop their plan, they would have followed the advice they heard from the financial entertainer, and they’d have less in student loans, but nowhere near the emergency fund to help with living expenses during this time of transition. They’d also have a lot more stress, and their debt would be increasing.
The moral of this story is not to replicate the plan described above–that would be the same as blindly following generic advice heard on TV. Instead, the morale of the story is to look for a financial advisor willing to create a personalized plan for your life; one that will help you address multiple goals at once, instead of focusing on just one. If everything goes as planned, putting all of your effort into one goal at a time will probably work. But, if life throws a curveball, which is most certainly will, focusing on that one goal may leave you underprepared for an emergency.
If you don’t think there are advisors willing to work on a financial plan like the one described, you’re wrong. While many old-school advisors aren’t looking to help Millennials with their planning needs, there are a growing number of CFP® professionals who are. The XY Planning Network is a great place to start your search, or you can see how my firm works with Millennials here.
Disclaimer: Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining your individual situation you should consult your financial advisor. For all of the disclaimers, please see my disclaimers page.
