An important way parents can help their young adult offspring set themselves up in the world is by helping them understand the basics of managing their finances. The challenge is that parents must teach these lessons with the understanding that millennials face an entirely different set of financial realities than they encountered as young adults.
In short, the basic financial rules may not have changed from a quarter century ago, but the landscape certainly has -- and that requires a new set of financial habits to address those hurdles.
The basics of household finance
When it comes to teaching your child about the basics of household finance, here are the topics every modern adult needs to understand:
- Responsible use of credit
- How to use different types of bank accounts
- Building an emergency-savings fund
- Saving for retirement
The truth is, all too many middle-aged parents these days have been less than brilliant at implementing these lessons themselves, but at least in those cases there is the potential to help young adults learn from their parents' mistakes. However, just as millennial culture and social habits are different, millennial finances are distinctly different too. Recognizing those differences can help parents and their adult children figure out strategies for navigating today's financial environment.
How millennial finances differ from prior generations
Here are some examples of how millennial finances often differ from those of their parents' generation:
1. Lower incomes
Millennials have lower incomes than prior generations at a comparable age. A Federal Reserve report compared millennial finances with those of the baby boom generation (born from 1946 to 1964) and Generation X (born 1965 to 1980).
Adjusting for inflation, millennials have lower incomes than those previous generations did at similar ages and for comparable jobs. Baby boomers on average made 14 percent more money than millennials, and members of Generation X made 11 percent more. This makes it more difficult for millennials to follow the budget disciplines of saving money and staying out of debt.
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2. Soaring student-loan debt
Speaking of debt, in particular student-loan debt has caused many millennials to fall into a hole before their careers even start. According to figures compiled by Chamber of Commerce, a small-business-advocacy organization, 44.5 million Americans today owe student-loan debt totaling $1.5 trillion.
The average person who graduated in 2016 owed $37,102, a 78 percent increase in the average-student-loan-debt burden ten years earlier. What all of this means is that, because millennials make comparatively less money than their predecessors, they also have less latitude in their budgets since student-loan payments give them a significant obligation to meet every month.
3. The nature of today's debt inhibits millennial net worth
Despite the student-loan-debt problem, millennials actually have a lower average-total-debt burden than members of Generation X did at a comparable age. The problem is the nature of that debt. Millennials have more student-loan debt and less mortgage debt than the previous generation did, which means their debt payments are not contributing toward building equity. Mortgage payments add to net worth while student-loan payments do not, which means that today's young adults are at a disadvantage when it comes to building wealth.
Strategies for millennial finances
Here are some ways to deal with the financial conditions facing today's young adults:
1. Minimize discretionary borrowing
It's good that millennials are taking on less non-student-loan debt than the previous generation. With credit card, car loan and mortgage debt all at or near record levels, it's clear that older adults haven't always made the best borrowing decisions. Young adults could benefit from not taking on the same bad habits.
2. Use accelerated debt payments as a central budgeting technique
As burdensome as student-loan-debt payments already are, millennials should attack the problem by paying extra amounts whenever possible -- even striving to set up their budgets around the assumption of making extra payments.
This could have several positive impacts. It allows the student-loan borrower to reduce the total interest paid over the life of the loan and achieve the budget flexibility of not having student-loan payments sooner. Committing to accelerated debt payments also imposes a strict budget discipline that discourages unnecessary spending.
3. Once student-loan debt is paid, use those payment amounts to catch up on saving
One benefit of devoting extra amounts to killing off student-loan debt sooner is that, once you achieve that goal, you can devote the extra room for those payments to saving for the future. This lets you start catching up on the delay in saving and building wealth caused by graduating with student-loan debt in the first place.
Conditions change over time, and each generation has to learn how to play the hand it has been dealt. That hand holds a different set of cards than the one their parents received, but it doesn't mean parents don't know the game well enough to help their young adult children make the best of it.
More resources for millennial finances
More resources on bank accounts
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More resources on emergency funds
More resources on saving for retirement