In our rapidly-evolving financial landscape, each generation faces its own unique set of challenges – and opportunities. Depending on whether you’re in the Early Accumulation or the Growth and Planning Phase, understanding your distinct needs and priorities based on how far you are along in your professional and financial journey is essential for good planning.
At Magellan Financial, we aim to provide tailored guidance to help individuals from each generation navigate their wealth accumulation and management more effectively. In this blog post, we’ll delve into specific tips for Gen Z, Millennials, and Gen X, offering insights for members of each cohort to navigate their personal finances.
Gen Z: Embracing Financial Education and Building a Solid Foundation
Born between the mid-1990s and early 2010s, Gen Z is the first generation to grow up entirely in the digital age. If you’re in this group, there’s a decent chance that you’re tech-savvy, socially conscious, and value authenticity in their interactions and pursuits. However, Gen Z also faces distinct financial challenges, including the sky-high cost of higher education, economic uncertainty, and the emergence of the gig economy.
As Gen Z steps into adulthood amidst a rapidly changing economic landscape, mastering financial wellness becomes paramount for securing a prosperous future. With unique challenges and opportunities, high-earning Gen Z individuals require tailored strategies to effectively navigate the complexities of their money management. We strive to empower our Gen Z readers to take better control of their finances, build wealth, and better establish sustainable long-term habits.
Embrace Financial Literacy
The initial step in the journey towards financial literacy is understanding core financial concepts. Young professionals should familiarize themselves with the time value of money, the principle of compound interest, the implications of inflation, and the rudiments of taxation. Without a grasp on these basics, more advanced financial decisions can become unnecessarily challenging.
Some institutions are attempting to help young adults build this foundation; for example, Wells Fargo offers its Hands on Banking program to a variety of audiences, including young professionals. The program offers a number of topics and can help young professionals take control of their financial futures. Here at Magellan Financial, we also feature a number of helpful resources for getting started with personal financial management via our Knowledge Center.
Budget Wisely
For members of Gen Z who may be relatively new to managing all of their personal finances, it’s helpful to use budgeting apps or spreadsheets to monitor spending habits and identify areas for adjustments. Each of those adjustments hinge on prioritizing needs over wants. Differentiate between essential expenses (e.g., housing, groceries, utilities) and discretionary spending (e.g., entertainment, dining out) to allocate your limited income more effectively. Often overlooked, set savings goals and aim to pay yourself first each month. Establishing short-term and long-term savings goals, such as building an emergency fund, saving for more education or vocational training, and investing for the future, will better insulate you against cyclical economic and market downturns.
Invest Early and Wisely
Compound interest is the marvel in the world of finance! It’s the interest on your initial principal, plus the accumulated interest from previous periods. And the earlier you start, the more you benefit. Let’s take an example: if at 25, you start saving $200 a month with an average return of 7% annually, by 65, you’ll have approximately $525,000. If you start at 35, with the same conditions, you’ll only have around $245,000 by 65. That’s a whopping $280,000 difference!
Consider investing in diversified, low-cost index funds or exchange-traded funds (ETFs) to gain exposure to the stock market while minimizing fees. Take advantage of employer-sponsored retirement plans. If available, contribute to employer-sponsored retirement plans such as 401(k)s, especially if your employer offers matching contributions. That’s essentially free money. If applicable, align your investment decisions with your values by investing in companies and funds that prioritize environmental, social, and governance (ESG) criteria.
Build Credit Responsibly
Whether it’s managing your credit cards, student loans, car loans, or mortgage, the decisions you make in your 20s can have lasting impact on your financial success down the road. Negative events can stay on your credit history for up to seven years, making it more difficult (and expensive) to obtain credit in the future. Be sure to make timely payments and maintain a positive payment history and improve your credit scores. Importantly, aim to keep credit card balances below 30% of the credit limit to demonstrate responsible credit management and avoid excessive debt. Sign up for credit monitoring and take advantage of annual free credit reports to ensure that you know precisely what lenders see when they look at your credit profile.
Millennials: Tackling Student Loan Debt and Planning for the Future
Millennials, born between the early 1980s and mid-1990s, entered adulthood during a time of economic uncertainty and technological advancement. Many Millennials still carry the burden of student loan debt, making it challenging to achieve traditional financial milestones such as buying a home or saving for retirement. It’s essential for Millennials to develop strategies for managing and reducing their debt while also striking a balance with other financial goals, such as a home, retirement, and/or saving for the next generation’s higher education.
Manage Debt
For our Millennial readers, refinancing and consolidating debts can help lower payments and simplify finances. While interest rates are higher than they’ve been in recent history, they won’t be this high forever (and in the future, they may even be higher!). It’s far from a certainty, but the Federal Reserve has already suggested there may be cuts coming in 2024. If and when they do, investigate options for refinancing any recent home purchases or securing lower rates on your student loans. In fact, the new SAVE repayment plan, to be fully implemented this year, can help even six-figure earners reduce their monthly student loan payments. Contact your loan servicer to learn if the new repayment plan is right for you.
Prioritize Retirement Savings
As true for Millennials as it is for members of Gen Z, the power of compounding means that the earlier you start saving for the retirement, the better. At the least, up until now you should have been contributing enough to secure your employer’s 401(k) match. As your income grows, however, you should aim to incrementally increase your retirement contributions to save at least 15% of your pre-tax income for retirement. Use windfalls, such as tax refunds or bonuses, to boost your retirement savings further. Depending on your tax bracket and whether you fall under the income limits, also consider whether investing in a traditional (tax-advantaged) or Roth IRA account makes sense for you.
Optimize Income
Increasingly, young professionals are diversifying their income streams through passive income or side ventures – if not both. Particularly post-pandemic, more opportunities exist than ever before, largely because the divide between office and home has become permeable. Try to identify ways to monetize the hobbies that you’ve already cultivated through the years. We even wrote a popular blog on the topic just last year to help young professionals kick-start their secondary income streams.
Turn your passion into a revenue generator. For example, if you’re a skilled photographer, you can sell your photos online or offer photography services for events. Depending on the stage you’re at in life, you may also have some underutilized assets. Perhaps you bought a bigger home because it was a good investment in the area but at present you have an unused room. That’s a great opportunity to add an additional income source. Alternatively, if you’re already considering a vacation home for yourself, see if there’s a way for you to turn a cost into a gain. With smart financing in a popular vacation locale, you can often cash-flow payments on a second mortgage by renting out the property when your family is not using it.
Gen X: Balancing Career Advancement with Investment Planning
Gen X, born between the mid-1960s and early 1980s, often find themselves in the middle of their careers, juggling professional advancement with family responsibilities and investment planning. We strive to help our Gen X clients strike a balance between their short-term needs and long-term financial goals.
Maximize Tax-Advantaged Accounts
As you enter your peak earning years, maximizing tax-advantaged contributions can both slash your taxes owed while also allowing your investments to grow tax-free until retirement. Since the IRS allows individuals over 50 to contribute additional amounts to their 401(k) and IRA accounts, take advantage of catch-up contributions to accelerate your retirement savings growth. If allocating the limit into both types of accounts, those of you 50+ can stash away a whopping $30,000 in 2024.
At this point, you should also evaluate the benefits of converting traditional IRA funds to a Roth IRA. While the conversion triggers a taxable event, the long-term benefit of tax-free growth and withdrawals in retirement can be significant, especially if you expect to be in a higher tax bracket later. Speak to a financial professional to determine if an IRA conversion makes sense for you.
Increase Professional Leverage
Industries are constantly evolving; coupled with higher compensation in mid-career, that makes members of Gen X particularly susceptible to downsizing and other transitions. To help protect yourself, continue to invest in your professional growth via advanced degrees, certifications, or executive education programs. Staying at the forefront of your industry can both insulate you from changes while potentially opening the doors to higher-paying opportunities. Similarly, continue to cultivate a robust professional network. Attend conferences, join (or lead!) professional associations and engage in mentorship opportunities. Finally, regularly negotiate your salary and bonuses. Understand your worth in the marketplace and be prepared to articulate your value to your employer.
Transfer Wealth and Plan for Your Estate
If you’re not already doing so, invest in 529 college savings plans for your children or grandchildren. Some contributions provide state income tax deductions, while contributions grow tax-free. As long as the proceeds are used for qualified education expenses, 529 plans offer a strategic way for members of Gen X to support their family’s education while optimizing tax benefits. Worried about how to prioritize saving for retirement vs. saving for higher education? We wrote an article to help you decide on how to balance the two.
This is also a great time to review your life insurance policies. The right life insurance strategy can play a key role in helping you achieve your financial goals. In addition to helping replace lost income or secure your estate and legacy, life insurance can also be useful in providing education funding for future generations in the long term. Here at Magellan Financial, we offer a wide array of life insurance services for every stage of your life and help you answer any questions you may have.
Please consider the investment objectives, risks, charges and expenses carefully before investing in a 529 savings plan. The official statement, which contains this and other information, can be obtained by calling your financial advisor. Read it carefully before you invest.
Final Thoughts
Navigating financial planning across generations requires a nuanced understanding of unique needs, preferences, and challenges. By providing tailored guidance and support to Gen Z, Millennials, and Gen X, we aim can help individuals make informed decisions and achieve their financial goals. Whether it’s leveraging technology for financial literacy, tackling student loan debt, or planning for retirement, we believe personalized advice is essential for building a solid financial foundation and securing a prosperous future.
For More Tips for Budgeting and Spending for High Income Families, Contact Our Team Of Financial Advisors Today!
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Magellan Financial Heirloom Wealth Advisors is a separate entity from WFAFN.
Wells Fargo Advisors Financial Network and its affiliates do not provide legal or tax advice. Be sure to consult your own tax advisor and investment professional before taking any action that may involve tax consequences.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The report herein is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here reflect the judgement of the author as of the date of the report and are subject to change without notice. Any market prices are only indications of market values and are subject to change. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy and security or instrument or to participate in any trading strategy. Additional information is available upon request.
Sources:
- The 4 Phases of Retirement Planning (Magellan Financial, 2022)
- Hands on Banking (Wells Fargo, 2024)
- Helpful Resources (Magellan Financial, 2024)
- Every 25-Year-Old in American Needs to See this Chart (JP Morgan Asset Management, as published by Business Insider, 2016)
- Stock Market Outlook 2024 (Magellan Financial, 2024)
- The New Income Driven Repayment Plan: How Save Works (Nerdwallet, 2024)
- Options for Professional to Supplement Income (Magellan Financial, 2023)
- 401(k) Limit Increases to $23000… (IRS.gov, 2023)
- How to Balance Retirement and College Savings (Magellan Financial, 2019)
