Millennials now account for a third of the population. They’re just entering the professional workforce, making their living arrangements, starting families and building their lives for the first time. This is an absolute gold mine for financial planners looking to what’s next as their Boomer clients enter their twilight years and begin retirement.
This younger generation will begin long-term financial planning while also being saddled with student loan debt, however. They struggle with personal finance knowledge, even with the greater financial burdens they’ve already survived. A recent study found that of those in the age group 23-35, only 24% demonstrated knowledge of basic financial concepts. The report concludes that while Millennials have significant debt, too often they have don’t know enough about financial planning concepts to tackle their debt effectively.
The study also showed that the generation failed to demonstrate knowledge involving more complex financial issues, like basic asset pricing and inflation, while they are also developing expensive credit card habits. Researchers subsequently found that Millennials were already dipping into retirement accounts for extra money.
This is concerning, as it appears most young people are entering into the acquisition years with large amounts of consumer debt, expensive credit habits along with enormous student loan debt. It is possible, however, that this generation keeps financial planning firms afloat due to its monstrous size and educational background, will which mostly likely lead to higher future income levels. Here are a few of the things that financial planning professionals can do to get this generation on the right track early in their working lives:
Do: Keep Things Simple
It’s easy for younger clients to feel overwhelmed by all the various financial planning decisions that face them and the numerous products available to them in the marketplace. To begin accumulating wealth, the bottom line is that this generation must begin to save more and spend less. It is important to note that advisors should not encourage young workers to get so aggressive with paying down debt that they completely eradicate their savings. It’s important for this generation to have at least $1,000 hidden away as an emergency savings fund sp encouraging them to cut spending where possible and increase earning power as an essential first step in long-term financial planning.
Don’t: Cut Out Credit Completely
With the younger generation lacking a complete understanding of basic financial concepts, making the decision to break up with their credit cards could easily sound like a great idea. However, these clients need to understand that using a debit card exclusively can not only make them vulnerable to security and identity theft risks, but it also does not keep their credit up to date and revolving, which can negatively impact their FICO score.
Make sure that these clients are aware that they shouldn’t close credit accounts, which can also bring down a FICO score. It is worthwhile to inform clients to be financially educated while also having a thorough understanding of the best uses of credit. For example, informing younger clients that using their debit cards for smaller purchases as well as keeping lower credit card balances that they can pay off monthly is key to boosting their credit health and their credit score as well.
Do: Educate Young Clients on Investing
This is the generation that came of age during the 2008 recession so they’re understandably wary of investing in the stock markets, but it’s especially important to dive into long-term financial planning as soon as possible so their savings can outpace the rate of inflation. It’s also important for these clients to have accessible emergency funds available so that unexpected expenses can be covered without falling back on credit or worse, retirement accounts.
It is also important to get a younger client’s retirement account in order. If they have a company-sponsored 401(k) plans, are they using it? Are they taking advantage of any employer-matched contributions? If not, they should be.
401(k)’s are a good vehicle to get Millennials thinking about retirement because of the convenience factor given that the money never touches their bank account. If they don’t work at a place with an employer-sponsored 401(k), the next option is to fund an IRA or open a Roth IRA while making sure they understand the difference between the two and how they are taxed differently.
Don’t: Alter Savings Efforts to Pay Down Debt
While paying down debt is, in general, a good idea for most people, it isn’t the best idea if it has negatively impacted a client’s ability to work towards high priority savings goals. It is vital to continue saving money, preferably into an interest-bearing account. One of the best avenues for savings is an independent retirement account opened during early employment, which can have long-lasting benefits for financial health down the road.
It seems counterintuitive, but in some cases, it is advisable to not tackle debt aggressively, especially student loan debt. Interest rates on student loans is often less than what could be earned with the right investments in place. Focus on setting savings goals and priorities with clients and from there, both advisor and client can design a plan that’s the best way to pay off any student loan or credit card debt quickly and efficiently.
Understanding the needs of younger clients is essential to successful long-term financial planning and a beneficial advisor-client relationship for both parties. Determining debt repayments that fit with current income and debt levels, coinciding with savings plans for both emergency funds and retirement vehicles are great places to begin filling in the knowledge gaps that research has shown regarding highly-educated, highly-indebted Millennials. Paying attention to these Do’s and Don’ts early in a client relationship will help establish a foundation of long-term trust while also building, hopefully, client accounts.