Financial Planning for Millennials and Gen-Z: Setting and Achieving Financial Goals

You can argue that every generation had a fair share of unique financial challenges of their time. Today, inflation is an economy-wide problem, the booming job market in the aftermath of the Covid-19 pandemic has recently returned to normal, and it’s becoming a lot tougher to find a new job. In addition, it is more difficult to buy a home because over the past four decades, home values have increased much faster than incomes. The inflation-adjusted median household income in the U.S. has climbed by 27%, from about $56,000 in 1984 to about $71,000 in 2021. By comparison, the inflation-adjusted median U.S. home value has climbed by about 102%, from about $232,000 in 1984 to nearly $468,000 in the last quarter of 2022.

Financial planning is crucial for Millennials and Gen-Z as they navigate the unique challenges and opportunities of today's economic landscape. By setting and achieving financial goals, these generations can build a secure and prosperous future. Here are some essential steps to guide you through the process:

1. Assess Your Current Financial Situation

Begin by assessing your total monthly income and understanding where your money is going. Categorize spending into essentials (e.g., rent, utilities, groceries) and non-essentials (e.g., entertainment, dining out) to identify areas for potential savings. Tools like budgeting apps can help you get a clear picture of your financial health, enabling you to make informed decisions while automating the manual and time-consuming tasks of tracing your money.

2. Set SMART Goals

Financial goals should be Specific, Measurable, Achievable, Relevant, and Time-bound (SMART). Define what you want to achieve, whether it’s paying off student loans, saving for a house, or building an emergency fund. See an example for a SMART goal.

Goal: "Save $5,000 for an emergency fund within one year.

• Specific: The goal is to save a set amount ($5,000).

• Measurable: Track progress monthly by aiming to save approximately $417 each month.

• Achievable: Based on your income and expenses, this amount is feasible.

• Relevant: Building an emergency fund is crucial for financial security.

• Time-bound: The goal has a clear deadline of one year.

A structured approach makes it easier to track progress and stay focused on your financial goals. Breaking larger goals into smaller, manageable tasks can help maintain motivation and track progress.

3. Create and Stick to a Budget

A well-structured budget is the foundation of financial planning. Allocate your income towards necessities, savings, and discretionary spending. The 50/30/20 rule is a popular guideline: 50% for needs, 30% for wants, and 20% for savings and debt repayment. Regularly review and adjust your budget to ensure you stay on track.

• 50% for Needs: These are essential expenses like rent/mortgage, utilities, groceries, transportation, insurance, and minimum debt payments. For example, if your monthly income is $3,000, $1,500 would go towards needs.

• 30% for Wants: This includes non-essential spending, such as dining out, entertainment, vacations, and subscriptions. In the $3,000 scenario, this means allocating $900 to wants.

• 20% for Savings or Debt Repayment: This portion goes toward building an emergency fund, retirement savings, or paying off debt faster. In this case, $600 would be set aside for savings or debt repayment.

This method helps you prioritize essential expenses, control discretionary spending, and build financial security of course, you can adjust the percentage breakdown above based on your circumstances, but the north start goal would be to reduce the percentage for Wants and Needs and increase Debt Repayment or Savings Rate more than 20% over time. Once you have enough saved for appropriate emergency funds, you should consider an investment strategy that suit your risk tolerance, financial goals and lifestyle. We will mention high-level information below, but we can save this topic for another time for more details.

4. Build an Emergency Fund

An emergency fund is essential for financial security. Aim to save three to six months' worth of living expenses to cover unexpected costs. Start by setting aside a small amount each month and gradually increase your savings. Keep this fund in a high-yield savings account for better returns and easy access. Relying on savings rather than credit cards prevents high-interest debt from accumulating during financial hardships.

Building an emergency fund is essential for financial security, and there are a few key strategies to make it easier. Start by setting a clear goal—aim for 3 to 6 months’ worth of living expenses. Automate your savings by setting up a direct deposit from your paycheck into a separate savings account, so you aren’t tempted to spend it. Save this fund in a high-yield savings account for better returns and easy access. How do you exactly build this fund? It’s also helpful to start small if the goal seems overwhelming—saving even $20 a week adds up over time. Reduce non-essential expenses, like dining out or subscription services, and redirect that money toward your emergency fund. For example, if you cut down on coffee shop visits, which might cost $5 per day, you could save $150 a month—an amount that can quickly grow into a substantial safety net. By consistently sticking to these habits, you'll gradually build an emergency fund that offers peace of mind and financial resilience.

5. Tackle Debt Strategically

Paying off debt quickly requires a strategic approach. Start by creating a detailed budget to track your income and expenses, helping you identify extra money to allocate toward debt. One effective method is the Debt Snowball, where you focus on paying off smaller debts first. For example, if you have a $500 credit card balance and a $5,000 car loan, pay off the credit card first while making minimum payments on the car loan. Once the smaller debt is cleared, roll that payment into the next debt, building momentum. Alternatively, the Debt Avalanche focuses on paying off high-interest debt first, which can save you more money in the long run. Consolidating debt into a lower-interest loan is another strategy that simplifies payments and reduces interest, especially if you’re juggling multiple credit cards. Cutting non-essential spending, like dining out or unused subscriptions, and using the savings for debt repayment can accelerate progress. Increasing income, whether through a side hustle or selling unused items, also helps. For instance, taking a part-time freelance job could generate an extra $200 per month, which you could apply toward debt. Finally, consider negotiating lower interest rates or making biweekly payments to further speed up your debt payoff plan. By combining these tactics, you can significantly reduce your debt more quickly.

6. Start Investing Early

Investing in stocks as early as possible is crucial for building long-term wealth, as history shows that the stock market tends to grow over time. For example, the S&P 500, despite market downturns, has historically delivered an average annual return of around 7-10% when adjusted for inflation. This means that starting early allows your investments more time to compound, where returns generate further returns. Legendary investors like Warren Buffett started investing at a young age, giving their portfolios decades to grow. Buffett’s investment philosophy, built around long-term, value-based investing, is a testament to how time in the market beats timing the market. For beginners, it’s essential to start small, diversify investments across different sectors, and prioritize low-cost index funds or ETFs that mirror market performance. Avoid chasing trends and focus on consistency—investing regularly, even in small amounts, can result in significant growth over time. Using a “buy and hold” strategy while reinvesting dividends can further accelerate portfolio growth. Starting early gives you the greatest advantage: time.

Other Things to Note

Major life events like buying a home, starting a family, or pursuing further education require careful financial planning to avoid unnecessary debt, making it essential to estimate costs and incorporate them into your goals. Continuously educating yourself about personal finance through books, blogs, and workshops is also vital as the financial landscape constantly changes. Seeking professional advice from a financial advisor can provide personalized guidance and help optimize your financial strategy. Lastly, staying committed to your financial goals while remaining flexible to adjust for life changes ensures long-term success. Regular reviews and adjustments keep your plan on track.

Conclusion

By following these steps, Millennials and Gen-Z can take control of their finances, achieve their goals, and build a secure financial future. Remember, consistency, education, and a proactive approach are key to successful financial planning. Start today and set yourself on the path to financial success.

**Disclaimer: This blog may include AI-generated content derived from web crawling, and it features quotes from original cited inline or public sources. The information presented is for general informational purposes only and may not reflect the most current data or information available. While we strive for accuracy, we encourage readers to verify the information from original sources or reach out to a certified financial adviser for important financial decisions.