Millennials have a lot of things going for them – but a strong financial situation isn’t always one of them. According to a recent Experian analysis, their average credit score is 625 and their average debt excluding mortgages is $26,485. Meanwhile, Baby Boomers have an average credit score of 709 and their debt excluding mortgages is only around $19,217.
This current financial picture leads many Millennials to prioritize getting out of debt, rather than saving for the future. Unfortunately, this is a trend that can prevent you from achieving true financial freedom down the road. In many cases, it can actually be in your best interest to build your savings and pay down your debts at the same time. Here are five easy ways to get started:
1. Start now. The longer you save, the more money you’ll build over time. If you start saving $3,000 a year at 25, you’ll end up with $120,000 by the time you’re 65. If that money grows at an annual rate of four percent, you’ll end up with around $290,000. If you wait until you’re 45 to start saving, you’ll need to put away $6,000 each year to reach $120,000 by the time you’re 65. However, that number will only grow to about $180,000 at an annual rate of four percent, because you’re not taking advantage of the power of time and compounding interest.
2. Track your spending. Now that you know why it’s so important to start saving for the future, you’ll need to adjust your budget so you can. To get started, you first need to figure out where your money is going each month. Track your spending on everything – including the necessities like your rent, bills, car payment, and debt payments, as well as your non-necessities like dining out, entertainment, cable TV, clothes, and gifts. Mobile apps, such as Mint, make it easy to keep track of your spending. Here are our top picks for mobile apps to get your finances in order.
3. Look for ways to save. Once you’ve tracked your spending for a month or two, start looking for ways to cut back. For example, make your own coffee instead of stopping by Starbucks each morning, only have a single drink when you’re out with friends, and cancel your cable. If you really want to make a dent in your budget, look for a less expensive place to live and consider riding your bike to save on car and transportation costs.
4. When possible, don’t let debt prevent you from saving. Despite what many Millennials believe, it can be possible to save for the future and pay off your debts at the same time. For example, as soon as your paycheck comes in, put a percentage in your savings account. Then, pay for your necessities, including your debt payments, rent, gas, and groceries. From there, put the leftover funds toward the luxuries in life, like eating at a nice restaurant and going out with friends.
With that said, there are some cases where it may make sense for you to pay down your debts first, before you start saving for the future. Here are some questions to ask to determine which is the right path for you.
5. Consider refinancing your debt. Student loans and bankcards are the two highest sources of debt for Millennials, accounting for 24 percent and 27 percent of what they owe, respectively. When you refinance student loans and other debts, you can achieve a smaller monthly payment and a lower interest rate. Not only will this free up funds to put toward your savings, but it will also allow you to pay off your debts more quickly.