As people move through various life stages, their financial goals and priorities change. One thing that remains consistent for many is the challenge that comes with balancing long-term savings goals with short-term needs. Regardless of age or income level, people often make lifestyle choices that affect their immediate financial situation, which can have long-term effects. Millennials (those born after 1980), in particular, are in a unique situation when it comes to saving for the future. On one hand, time – and the power of compounding money and interest that comes with it – is on their side. On the other, they face unique spending and saving challenges.
According to the Financial Trade-Offs study, commissioned by Ameriprise Financial, Millennials are significantly more likely than both Boomers and Gen Xers to be consciously cutting back on discretionary expenses. This includes things like electronics (69 percent of Millennials say they’ve cut back on this compared to 57 percent of Gen Xers and 45 percent of Boomers) and car payments (32 percent of Millennials have scaled these back – more than any other generation surveyed). While Millennials are cutting back on spending, at the same time they’re failing to save diligently, creating an interesting paradox.
Disconnect between spending cut-backs and saving
The study found that younger Americans are likely to take on a large amount of debt while trying to balance saving for other financial goals. It appears as if the cash that they’re saving by making spending trade-offs may actually be helping pay down debt rather than grow their savings. Seventy-eight percent of those who have credit card or other miscellaneous debt say that it has made them feel stretched financially. Additionally, 76 percent feel that their car payments have been a stretch.
The challenges that come from trying to pay down debt may be the reason that 59 percent of Millennials say they have a monthly savings plan compared to 75 percent of Boomers. Additionally, only 43 percent of Millennials with access to an employer-sponsored retirement plan are contributing enough to get the maximum employer match. And 69 percent have either reduced their contributions or say they would reduce their contributions in the future.
Failing to systematically save and the long-term impact on financial goals
There’s no denying that altering spending habits is challenging. Let’s face it, changing any habit can be difficult. But, more often than not, people find it beneficial. In this case, changing day-to-day spending habits can lead to extra cash, which may add up over time and make a big difference. Millennials looking to fund long-term financial goals should consider these steps.
• Don’t over-extend yourself when you’re making big purchases like a home or car. Despite tighter lending limits, it appears that many young homeowners have still borrowed beyond their means to afford their homes. Seventy-seven percent of Millennial homeowners admit that their mortgage payments have been a stretch. Some people may feel tempted to stretch themselves, but in the long run it’s not worth it. Not only will they likely feel stressed about money on a day-to-day basis, they also may not be able to save toward other long-term financial objectives.
• Say no to unnecessary expenses. According to the study, 36 percent of Millennials don’t currently have the discipline to say “no” to unnecessary purchases. Before making a purchase, ask if it’s really worth it. Do you really need another new shirt? What if you went out to eat only one night per week vs. two or three? Can you bring your lunch a few times per week? Have you considered carpooling? Ask these questions and assess your situation. You might be surprised at how making a few changes can have an impact on your wallet.
• Create a financial plan or monthly budget. Making a decision to give up something today to save for tomorrow isn’t easy if you don’t know where your money is going and why. Cutting back requires juggling financial priorities, putting off some of today's needs to support tomorrow's goals.
Consider talking with a financial advisor to create a plan. Working with a financial professional can hold you accountable to attaining your long-term goals. Whether you choose to make small trade-offs or a few large ones, cutting back now to save for tomorrow will almost always bring rewards — emotionally and financially. Start planning now for your financial future.