6 Tips to Help Millennials Reach Retirement

December 3, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In this blog, you are going to learn about managing your money to retire.  The theory of Managing Money Life Cycle expands upon being a low earner with debt to saving for retirement. What is the right balance of saving to spending to being in debt?

 

Many younger millennials are coming out of college with massive amounts of student loan debt and have nothing saved for retirement.  Now faced with low paying jobs and high debt payments, it is difficult to save money right? I believe the earlier a person starts saving, the better off he or she will be in the long run.  Saving for retirement is an extremely touchy topic for millennials and within reason. 


We are told by society to have debt because that is what young people need to have a "good life" and then worry about saving money later in their mid-career when you are making good money.  This couldn’t be any further from the truth!

 

The first thing to do is to avoid liability.  Not every person needs to go to college immediately after high school. The average student loan among those between 25-34 is $42,000.  I still can not wrap my head around graduated college students having $1,000 student loan payments every month.  It would be best if you avoid debt.

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Avoid Student Loans

 

My education was paid for by the military by paying into the GI Bill.  I was able to receive my Bachelor’s degree and made enough to pay for my own Master’s degree from a private university which was very expensive.  The military isn’t for everyone, and I get it.  However, you will receive a paycheck, and you get free tuition assistance while being in the service plus free education benefits afterward.

 

Another way which is more common is delaying college for a few years.  By making an agreement with your parents and sticking to the plan, you can live rent-free while working full time saving every dime.  Even if you can only make $15,000 per year, there is potential to keep $30,000 in two years which you can invest into a 529 College Savings Plan that grows tax-free if used for qualified expenses related to education.  

 

A 529 Qualified Tuition Program "College Savings Plan" is a tax-advantaged savings plan designed solely for future education expenses.  If you were to take and invest the $30,000 mentioned above, you could start college when you're 20, and you can finish a bachelor’s degree by the age of 23 to 24 years old.  The best part about this plan is while your friends are living off of Ramon Noodles post their college years because they are paying the monthly payments on their loans, you are living debt-free and your new salary carries you further per monthly paycheck because it affords you more options as you no longer have debt to pay on. I state this advice because your salary after college will be good but typically low when starting. Having a low salary following college graduation is normal.  (You can read more about the 529 Plan Here)

 

Now here comes the good part, if you avoided all debt, you can rapidly start putting money towards retirement.  Look into maxing out your 401(k)’s annual limit, establish an Individual Retirement Account (IRA), and start saving money for a house down payment.  This answers the question, “Should a 25-year old earning $35,000 per year be saving towards retirement?”. The answer is yes.

 

There are two primary benefits by starting sooner than later.  The first is conditioning your mind towards saving by making it a habit.  If you can only save 5-10% of each salary, then so be it. However, it would be best if you made it a good practice.  The second is the time value of money. The sooner one starts, the faster it will grow and accumulate earnings and interest.

 

Avoid the Society Norms

 

Our culture says to borrow early and often to get the things you want.  As your career develops, you’ll make more money and can quickly pay off the debts.  I argue this how people get into debt problems. When another recession hits, people get laid off, have no income, and have no means to pay the bills.  By putting yourself in the best possible situation in the worst possible times, you will have the wealth and means to buy at significantly low prices. Buying low and selling high is how Warren Buffet made his millions.  By in the economic downturns and profit (sell) when the economy is booming. You cannot buy if you’ve been chasing the herd (doing what everyone else is doing).

 

I am not referring to just investments. Housing prices drop, and auto dealerships struggle to sell new cars and trucks.  It is during these moments of opportunities that the rich get richer. Say your friends are buying new $65,000 BMWs and you decide to save your money instead.  After three to four years, you are paying cash with no monthly automobile payments. Your friends are making payments. Plus if the economy sinks, the $65,000 BMW will now be sold for $40,000.  The lower priced car will save you $25,000, and you can use the savings towards a home down payment.  

 

Getting out of Debt

 

If you are one of the unfortunate ones who have debt, then it is time to get a game plan together.  This game plan involves getting out of debt.  There are several methods and strategies designed to help people get out of debt.  The fastest method is paying off the debt with the highest interest rate first and then working your way down to the lowest interest rate.

 

The method of paying off debt may sound simple, and it is; however, we are humans and make mistakes.  Therefore, we struggle to maintain this plan because we lack focus and discipline.  That is where debt stacking (snowball) comes into play.  This method focuses more on psychology than mathematics.  When you are see your debt quickly being paid off, it has a positive impact on your psyche, and this motivates you to keep going.  This is also the preferred method because it “feels” like it's working faster.  Plus it usually frees up cash flow more quickly because the debt with the lowest balance is paid off first and then applied to the next debt.

 

Be sure to read “Paying Off Debt” within this website for tips on paying off debt. 

 

Debt Stacking

 

Often referred to as "Debt Snowball" or sometimes "Debt Stacking," both terms are synonymous.  These strategies are approaches in paying off the debt in the most meaningful and efficient manner possible.  When you are paying off debt, understand that it has both mathematical and psychological formulas that may seem complicated but in practice is very easy and straightforward.  

​Let me first state that I understand what it is like being in debt.  At 18, I quickly fumbled into credit card debt without a full-time job because I never learned the basic principles of managing money.  Nor did I understand the impacts of interest payments and its devastation it can cause.

​On this page, I want to share with you an approach that financial institutions apply because it is useful and saves money in interest payments.

Step 1 Devise a Plan

 

Sort and organize your debt by the highest interest rate to lowest.  Next, determine which bill has the lowest balance which you can pay off in 2-4 months.  After creating your priority list, it is time to devise a plan to be debt free.

Write down the monthly payment amount due from each bill.  The payment plan should help you to pay off the priority loans easily so you will be making minimum payments on the bills ranked from #2 and on.  This payment plan focuses with payments on bill #1 to quickly pay that off so in the next month once paid off, that amount moves to debt #2.

So try to put all the extra money towards the payment of the loans. You can also make double payments to decrease the repayment amount. In case of the other smaller loans, you can make the minimum payments until you are ready to pay them off.
​​
Step 2 Establish Automatic Payments

 

To be debt free quickly, use the automatic payment method. The best option to make timely payments is to set up an autopay with your bank account. The autopay option saves time and ensures payments are made on time. There is no need to fear about deferring the payments. However, ensure that your account has the amount during that time. By following these procedures, you can quickly clear all your debt to be debt free.

 

The process should look similar to below.  Write down all of your debts.

1  Bank of Dollar Otter       mo. $565 balance $2,4956.14  interest rate: 5.25%

2  ABC Store Credit Card  mo. $45 balance $265.23       interest rate: 23%

3  Mortgage                       mo. $1,235 balance $213,884 interest rate: 4.35%

4  Bank of DO Auto Loan  mo. $354 balance $13,455       interest rate: 3.54%

5  Credit Card 1                 mo. $200 balance $1,200    interest rate: 16.55%

 

Next, organize the debts from when you can pay off the soonest.  The goal here is to free up cash flow quickly so it can be applied to the next debt.  If you have strict discipline and know without a shadow of a doubt, you can stick to plan, then mathematically, organize from highest interest rate to lowest.  If you are struggling to make ends meet, then stick with the following approach.

2  ABC Store Credit Card  mo. $45 balance $265.23       interest rate: 23%

5  Credit Card 1                 mo. $200 balance $1,200    interest rate: 16.55%

1  Bank of Dollar Otter       mo. $565 balance $2,4956.14  interest rate: 5.25%

4  Bank of DO Auto Loan  mo. $354 balance $13,455       interest rate: 3.54%

3  Mortgage                       mo. $1,235 balance $213,884 interest rate: 4.35%

 

We have organized the debt from the lowest balance to the highest.  By focusing on ABC Store Credit, we can have this debt knocked in a few months.  Next, you’ll free up $45 per month plus any extra you’ve been paying, and you'll add this to Credit Card 1.  Instead of paying $200 monthly, you will be paying $245 plus extra if you can towards this debt. Increasing your payments to $245, you can kill this debt in 5 months.  

 

Now you have $245 to add to the $565 monthly payment towards Bank of Dollar Otter.  With $810 per month paying on $2,495.14, you will have this debt knocked out in less than three months.  In less than a year, you knocked out three obligations. Continue this strategy until all of your liabilities are paid off.

 

This strategy makes debt stacking highly effective and a great approach to stay motivated because you visually see your liabilities paid off quickly.  

 

Living Within Your Means

 

Now that your debt is ultimately paid off, you have freed up $2,399.  Since you are used to this money being tied to debt, start putting it towards retirement or an investment account.  This debt freedom equates to you saving about $29,000 a year. In 20 years, assuming NO interest is added, you’ll have $580,000.  With this super conservative figure, now imagine getting pay raises, promotions, and bonuses.  This half a million dollar figure quickly grows to make you wealthier.  

 

No matter if you are making $45,000 or $225,000 a year, the secret is living on less than you earn.  I’ve known people who have made millions yearly and had to come back to work because they spent their money entirely.  Not knowing how to live on a budget and within your means is the deadliest weapon to your financial health. The fast path to wealth is saving, and you can only collect money if you are living beneath your means.

 

Retirement Resources

 

Earlier I mentioned to max out your IRA and 401(k).  These are important because of the tax advantages these instruments provide.  As your wealth grows, you’ll need additional resources to find ways to earn money.  I highlight some of my favorite ways to make money in “5 Greatest Ways to Invest & Save Your Money”.   It would be best if you considered opening an account with Betterment or some firm similar. Also, lawyers and business practices are seeking investors.  It is why I like YieldStreet. Check out the blog to learn more.

 

 

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