4 Steps Millennials Can Take to Build Financial Security
Millennials are furthering their careers, earning higher incomes, building assets, and growing their families. Yet many still have large and distant goals, such as buying a home, sending kids to college, or retiring.
Consequently, building financial security takes prominence among millennial priorities. However, millennials may be unsure where to start. To help, this article will dive into four steps millennials can take to build financial security.
1. Build an emergency fund
An emergency fund is money you put in a savings account to prepare for situations like losing your job or covering a car repair bill. The fund helps pay for unexpected costs when they happen and keep up with living expenses.
In general, it’s recommended to save three to six months of living expenses in your emergency fund. If you have a larger family, you might want to aim for the upper end of that range. Store this money in a high-yield savings account. This can help you earn more interest, grow your savings, and mitigate inflation when not in use.
2. Get a life insurance policy
Getting life insurance is important because it can affect your loved ones if you pass away unexpectedly. It’ll pay out a death benefit they can use to pay off debts, replace your income, and set aside for emergencies.
There are two common types of life insurance you can consider. Term life insurance is a type of affordable life insurance that can last a set period of time, depending on your choice. For instance, you can get a 10-year or 30-year term life insurance policy. If you outlive the policy, you must renew coverage, but premiums are more affordable than permanent life insurance. Permanent life insurance costs more than term life insurance but lasts for a lifetime. They also come with cash value useful for building wealth.
3. Pay off high-interest debt
High-interest debt can weigh down your monthly budget and cause you to waste money on interest. Many also incur it for purchases that don’t offer returns — unlike student loans and mortgages, which offer an education or a home.
You can consider one of these two methods to pay off high-interest debt:
- Debt snowball method: With this method, you’ll pay off debts in order of principal balance from smallest to largest. Once you have paid off the smallest debt, you can move to the next smallest until you pay off all your high-interest debts. This method will cost you more in interest, but it helps you build momentum by paying off your first debt faster.
- Debt avalanche method: With this method, you’ll pay off debts in order of interest rate, from highest to lowest. Once you pay off the highest-interest debt, you can eliminate the debt with the next highest interest rate until all debts are gone. This maximizes your interest savings, but it can take longer to get your first win.
4. Increase contributions to your retirement account
Retirement accounts offer tax advantages to boost your retirement savings. You can invest your contributions into certain assets or investment funds to help your savings potentially grow faster.
Start with your workplace plan if you have a full-time job. Contributions are generally pre-tax, meaning these are subtracted from your income for tax purposes. Plus, they may offer a matching bonus, which is free money for retirement from your employer. Try to reach this amount at the very least.
Once you reach the matching bonus, consider an Individual Retirement Account, or IRA. Here are two types of IRAs:
- Traditional IRA: Traditional IRA contributions are pre-tax, but your retirement withdrawals are taxed at your ordinary rate. You are required to take Required Minimum Distributions, or RMDs, in retirement. These are calculated by the IRS.
- Roth IRA: Roth IRA contributions aren’t tax-deductible, but qualified withdrawals in retirement are tax-free.
Get ahead financially by following these steps
Creating financial security is fairly simple for millennials. Taking just a few steps can reduce financial stress and help prepare you for anything. Start by building or increasing your emergency fund in a high-yield savings account. After that, consider a life insurance policy to make sure your loved ones are financially protected.
Then, focus on paying off your high-interest debt using either the debt avalanche or snowball method. Once you pay off your debt, start or increase retirement account contributions to prepare for the future. Following these steps will maximize your financial security, giving you peace of mind.