Those who keep abreast with the latest in personal finance news have undoubtedly seen the articles reporting millennials have a savings rate of negative two percent. Yes, negative two percent. The reasons for such an abysmal ability to save includes: student loan debt, credit card debt, immediate gratification, low-incomes, distrust of banks, fear of investing and a myriad of other excuses.
Interestingly, our own study performed in May 2014 actually revealed millennials to be better savers than other generations. In fact, 74.8% of millennials surveyed saved money each month. However, our survey did show 39.5 percent of millennials went overdraft an average of 2.7 times a year (a $101 mistake). Over a third of the generation carried $8,864 in credit card debt.
Short of winning a lottery or reality-show competition, there are no quick fixes to help millennials handle their debt or pay for the fifth out-of-town wedding of the season. However, there are actionable steps to take in order to improve a negative savings rate.
1. Find a Better Bank
The Atlantic’s Bourree Lam notes the millennials generation’s distrust of banks as a reason the 18 to 35-year-olds may have an insufficient savings rate.
“This is paired with the fact that Millennials are more skeptical than ever of banks—perhaps not surprising for a generation that came of age during the Great Recession and Occupy Wall Street. One study named the financial industry as one least liked by Millennials—with Bank of America and Citigroup being the most hated.”
Well, there’s a pretty simple solution: Ditch. Switch. Save.
First of all, no one should be housing his or her savings account with Bank of America or Citigroup. Those banks offer a whopping 0.01 percent interest rate, effectively making a savings account with these banks an interest-free loan. And let’s not forget about those $35 overdraft fees and $12 fees to move money from savings to checking in the name of “overdraft protection”.
Internet-only banks offer interest rates close to one percent. This may sound insignificant, but could be an extra 50 to a couple hundred bucks. A savings account with $10,000 at 0.90 percent would receive an extra $90.41 in a year. $10,000 at 0.01 percent rate would get a whole $1.00.
Internet-only banks also offer real overdraft protection. There is no charge for moving money out of savings to cover an overdraft in checking. And guess what? It doesn’t cost the bank anything to make that transaction for you. So Bank of America is making $12 of pure profit anytime a customer goes overdraft and the bank’s “protection” moves money out of savings to checking for said customer. No wonder BofA makes nearly one million in fees per bank branch.
2. Reduce Credit Card Debt
Balance transfers offer millennials a short cut to paying off debt. By taking interest rates from nearly 20 percent or higher to zero, consumers are saving hundreds to thousands of dollars and shaving years off debt repayment.
Unfortunately, balance transfers scare a lot of people who feel beaten down by the financial system.
Many people don’t want to tangle with getting another credit card or worry about how the bank is going to trap them. Banks do offer these zero percent offers to lure people in and hopefully make money off them, but knowing the playbook gives consumers the ability to use the balance transfer offer without getting whacked with fees or hiked APRs. Those who lack discipline to put a credit card in the freezer and avoid spending shouldn’t do a balance transfer. But those with self-control and a 700+ credit score can drastically reduce their interest rates.
Balance Transfer Q&A
Q: Doesn’t applying for a balance transfer hurts my credit score?
A: Your credit score will take a small dip (typically 5 to 10 points) when you apply for a new credit card. But your credit score isn’t a trophy and should be used to help you get the best financial products. If your score is in the 700s, you can afford a 30-point dip to move your debt to one or multiple cards. You will also see those points return relatively quickly.
Q: Don’t I have to pay a fee?
A: Many cards do have a fee, but this fee is nominal compared to the amount of interest you’d be paying to your bank. There are some no fee balance transfer options, which can be found here.
Q: How do I complete a balance transfer?
A: We have several step-by-step guides (with pictures) on our site. Click here to find them. Be sure to read what to do after you’ve completed a balance transfer as well.
Q: What if one card doesn’t take all my debt?
A: You can try utilizing another balance transfer offer to move all the debt over. $8,850 of debt may take two separate cards.
Millennials paying $250 a month on $8,850 in credit card debt at 18 percent interest will take 4.25 years to pay it off and shell out $3,861 in interest alone.
By utilizing balance transfers, millennials with $8,850 could reduce their interest and fees paid to $560 and pay it off in just over three years. That’s already $3,301 that could go into savings, investing or towards paying down student loan debts.
3. Make Practical Investment Decisions
Financial reports often point to the millennial generation’s hesitation to invest as a byproduct of witnessing the fall out of the Great Recession in 2008. This type of past-negative thinking could cause millennials to stay in the workforce until well passed 65 because they were unable to save enough for retirement.
Retirement may seem a long way off for millennials, but committing to saving and investing early can be the difference between having a million or $50,000 in retirement.
Some companies force millennials into saving by creating an “opt-out” 401(k), which reduces the number of apathetic employees who feel too overwhelmed at the idea of picking investments and just avoid signing up.
Those millennials who keep procrastinating investing should consider simply putting their retirement savings in a target date fund.
A target date fund makes investing for retirement simple. Instead of needing to be hands on to balance an investment portfolio over the years, the target date fund simply transitions from aggressive to moderate to conservative as a person nears retirement.
For example, a 25-year-old who plans to retire around 65 would put all her 401(k) money into a 2055 target date fund (the funds are typically in increments of five years).
Right now, the fund would have the young millennial in a relatively aggressive portfolio with more of a focus on stocks, but as she ages towards retirement it would move from fewer stocks to more bonds and cash. This way, if the market did tank close to 2055, she would have her retirement savings in less volatile investments and not lose as much of her savings.
Millennials who don’t have a 401(k) option with an employer-match can still save for retirement through an IRA. A brokerage company like Vanguard offers a target date fund within an IRA. Retirement contributions can also offer tax breaks resulting in a higher tax refund which can either go directly into savings or towards student loan payments and other debts.
Those willing to tolerate a little more risk and with some extra money outside of an emergency savings account should also be investing outside of a 401(k) and IRA as well. Avoid the desire for individual stock picking though and focus on mutual funds and index funds.
Remember: the stock market will take dips. Don’t be overly emotional and resist the urge to start pulling money out any time there is a downturn.
Increase that savings rate
A negative two percent savings rate will cripple the millennial generation’s ability to pay for the next natural phases in life: to buy homes, purchase cars, send the next generation to college and retire. While the generation may focus on less materialistic goods and prefer to sink money into travel and life experiences, those still come with a hefty price tag. It’s time for the men and women in the 18 to 35 bracket to make tough decisions about what they can afford, focus on how to pay down their debt and get over fears of investing in the stock market.