There are several loose definitions used to describe the term “millennial” which can make it a challenge to figure out who falls into the widely discussed category. According to the U.S. Census Bureau data, a millennial is someone who is currently, as of 2017, between the ages of 18 and 34, born between 1982 and 2004.
Aside from entering adulthood in the 21st century, the millennial generation gets quite a bit of attention because the demographic makes up nearly 73 million people, or one-fourth of the U.S. population. With those numbers, this group of individuals is the largest of any such group in the last three decades, with more than $200 billion in purchasing power each year.
They are starting to make up a larger share of the workforce as the generation of Baby Boomers begins its waves of retirement, and they are the first generation to have access to an internet-connected world for most, if not all, of their lifetime.
While millennials have several interesting characteristics and show a great deal of promise in sustaining economies and shifting the working world for years to come, another aspect of being a millennial has plagued the generation more so than their parents or grandparents.
Millennials are typically entering their first careers with several times more debt than previous generations thanks in part to the rising cost of higher education and the ease of acquiring student loans. As a result, many young adults find themselves between a rock and a hard place when it comes to managing their finances, forced to delay traditional objectives like buying a home or starting a family.
In some cases, millennials make the hard decision to move back home with their parents, known as boomeranging because the idea of tackling their student debt along with everyday living expenses is too much to bear. The media gives the younger generation a bad rap at times, but when given a closer look, millennials were born into a somewhat broken financial system.
To break the cycle of moving back home with parents, misunderstanding responsibilities when it comes to debt, and missing money milestones, a degree of education would be helpful. Understanding how personal finance works, including debt and credit, bills, and student loans, is a necessary factor in the long-term success of millennial adults, their parents, and their children. This guide is meant to offer a foundation of financial education to assist millennials in reaching the financial success they crave.
Some say that debt is a necessary evil in life, and they might very well be speaking the truth. Put simply, debt is something owed, typically to a financial institution, that must be repaid over time. In today’s economic landscape, avoiding debt altogether is virtually impossible, especially when taking the plunge into major financial responsibilities, like buying a home or purchasing a new car. Debt is a significant part of life for millennials, so understanding how debt works is crucial to their adulting success.
Types of Debt
There are a handful of various types of debt out there in the world that millennials may use over the course of their lifetime, including installment and revolving debt. These two types of debts are broad categories, so it is helpful to understand the differences between them.
Installment debt involves borrowing a lump sum of money and promising to repay that amount over time, plus interest, through fixed monthly payments.
Revolving debt, on the other hand, is an open borrowing agreement, where individuals have ongoing access to funds within a stated limit. With revolving debt, minimum monthly payments are due, but repayment can be as long or as short as the borrower wants or needs. However, extending the repayment of revolving debt by paying only the minimum due may mean it takes years to pay back what is owed in full, including interest that has accumulated.
In addition to installment and revolving debt, millennials need to know that debt may be secured or unsecured.
Secured debt is borrowed money that is backed by some collateral – that is, an asset like a bank account or a possession that can be claimed by the lender should the borrower fail to repay the debt as agreed. Secured debt collateral is most commonly backed by a home, a vehicle, or a savings account.
Unsecured debt has no collateral that can be claimed by the lender in the case of default. But because the lender is taking on more risk with an unsecured debt than with a secured debt, the total cost of borrowing may be higher.
More About Debt
In the United States, the most common sources of debt among millennials and other generations include student loans, vehicle loans, credit cards, and mortgages. Student loans make up nearly $1.4 trillion across 44 million borrowers, while revolving debt, mostly comprised of credit card balances, accounts for $1.021 trillion as of June 2017. Over the last year, revolving debt alone has increased at a rate of 4.9 percent, and student loan debt continues to climb at an impressive rate.
These statistics are important to acknowledge because they provide a clear picture of how significant a role debt plays in the current economic landscape. It is readily available to those willing to take it on, but it can also lead to tremendous financial problems down the road. Those who disregard debt as simply free money or an easy method of getting the things they want or need can quickly bite off more than they can chew.
A vicious cycle of interest accumulation on outstanding debt balances begins, and without a plan to pay it off, debt becomes a burden that impedes progress toward other, often more important financial goals. With massive debt payments each month, there is little left to set aside for purchasing a home, saving for vacation, or contributing to a retirement account for the future. Understanding the dangers of debt is just as important as knowing the types of debt available.
Breaking Down Credit Cards
What is a Credit Card?
A credit card is a type of revolving debt offered by a financial institution, most often a bank. With a credit card, a borrower is given a credit limit which is the maximum spending amount, and only purchases up to that amount are allowed. As borrowers use credit cards to pay for transactions, whether big or small, the available credit limit is reduced until payments are made. Credit card balances accrue interest, often in the double digits, which makes it important for borrowers to have a plan for repaying any amount of the credit line that is used over time.
What is the Point of Credit Cards?
Credit cards are helpful in managing one’s financial situation because they provide quick access to funds. When a checking or savings account balance is not high enough to cover a purchase, a credit card may be used up to the available credit limit to pay for that transaction. For borrowers who have little to no credit history, which is the track record of one’s financial activities over time, obtaining a credit card is also a helpful tool. So long as the credit limit is used responsibly and payments are made on time, using a credit card can build one’s credit and ultimately improve one’s credit score.
Using a credit card responsibly means that any purchases made with the card are paid off in a timely fashion, and a borrower does not consistently spend more than the available credit limit. When a large purchase is made or multiple smaller transactions add up to a hefty balance, borrowers are not required to pay off the entire balance at once. Instead, they have the flexibility of paying off at least the minimum amount due over the course of several months or even years. However, credit card balances not paid off each month build up interest, and this interest can add up to a significant cost if it is left to accrue for an extended period. Also, leaving a credit card balance unpaid for a long time may reduce a borrower’s ability to access other credit vehicles, like a mortgage, an auto loan, or even a new credit card.
How Do You Manage Credit Card Debt?
Millennials should understand how to best manage credit card debt so it doesn't threaten their financial stability over time. Making just the minimum payment on a credit card balance is not typically a best practice because of the interest accrual mentioned above. Instead, borrowers should have a plan for paying off each dollar spent on a credit card, plus the potential interest it accrues, before making purchases above and beyond their means. When credit card debt becomes a burden, there are options for repayment that may benefit the borrower, including a balance transfer or taking out a consolidation loan.
With a balance transfer, borrowers may have the ability to transition a credit card balance with a higher interest rate to a new credit card with a low or zero percent interest rate. Balance transfers can be a smart tool for managing credit card debt, but borrowers should understand that the reduced interest rate is only in placer for a specific period of time, typically 12 to 15 months.
A consolidation loan may also be used to pay off a credit card balance with high interest. In this case, a personal, unsecured loan is used to wipe out a credit card balance in a single payment. The borrower then makes potentially lower interest and principal payments on a fixed monthly payment schedule to the loan provider. Personal loans are not revolving debt, so there is more predictability and control over repayment than a balance transfer may offer.
How Do You Get a Credit Card?
Despite the potential cycle of debt borrowers can get into with credit cards, obtaining a credit card is fairly simple. Individuals can go to their bank or credit union, a retail store, or a major credit card issuer to apply for a new credit card. The application process requires a borrower to provide some basic information, like name, date of birth, social security number, and address, as well as details surrounding level of income and monthly housing obligations (like rent or mortgage payments due).
The credit card issuer then performs a credit check where the borrower’s payment history and other outstanding debts are reviewed. If the individual has a strong track record of on-time payments and responsible use of credit then new credit card approval is likely provided. If payment history has been an issue in the past or there are other negative items on your credit report, getting approval for a credit card is not always a given. To improve the chances of approval, borrowers should have a clean credit history and steady income that can be verified.
Understanding Student Loans
A large portion of the millennial population graduated from college with sizeable student loan debt. Knowing what student loans are, how they work, and methods for managing them over time is critical to success as a millennial adult.
What is a Student Loan?
As a type of installment debt, student loans are funds borrowed from either the federal government or a private lender that are meant to help individuals pay for higher education costs. Federal student loans are provided by the Department of Education, while private student loans are offered through financial institutions like banks and online lenders. Student loan funds are typically paid directly to the school where a student is pursuing a degree to pay for common expenses, including tuition, room and board, books, and related fees.
How Do Student Loans Work?
Recently, the cost of attending a college or university has been increasing by more than the amount of inflation, making it difficult to pay for school expenses out of pocket. Student loans are offered to help cover these costs so millennials can have an opportunity to earn a degree and ultimately better their chances of landing in a career they are both passionate about and that generates a consistent, respectable income. Taking out a student loan to help pay for college expenses is done each term in coordination with the federal government, private lenders, and the school the student attends.
Students who require student loans to pay for their education can defer payments until after they leave school or upon graduation. However, repayment is required for all student loans, whether funded by the Department of Education or a private lender. Repayment terms vary greatly depending on the balance owed and the preferences of the borrower, but the most common repayment terms extend ten or more years to make the process of repaying easier for some borrowers.
There are risks inherent in student loans which borrowers should be aware of. The most pressing is borrowing a significant amount to pay for a degree and then facing financial difficulties after graduation because debt payments are high. Also, interest on most student loans accumulates even while the loans are in deferment, which can increase the total cost of borrowing for one’s education tremendously.
How Do You Manage Student Loan Debt?
Regardless of the type of student loan borrowed while in school, students are required to begin repayment shortly after graduation. Monthly, fixed payments are required, calculated based on the amount borrowed and any interest that has accumulated over the deferment period.
Federal student loans have several repayment programs available to student borrowers, including income-driven plans that base the monthly payment on a percentage of discretionary income. There are also standard repayment programs that extend out to ten years, as well as graduated and extended repayment programs that have a lower monthly payment and a longer repayment period. Some student loan borrowers may also have the ability to consolidate multiple federal student loans into a single loan repayment program, providing the chance to participate in income-driven plans.
Private student loans do not have the same income-driven repayment programs available to borrowers. However, repayment of private student loans may extend, on average, up to 20 years, making the monthly payment lower than a standard ten-year repayment plan. Private student loan lenders may also offer student loan refinancing for other private loans, federal student loans, or a combination of the two. Refinancing may lower the interest rate on student loan debt and extend repayment to help ease the monthly payment requirement. Student borrowers considering a private student loan refinance should be aware that refinancing federal student loans takes away their ability to participate in a federal income-driven repayment plan in the future.
How Do You Get a Student Loan?
Obtaining a student loan begins with completing the Free Application for Federal Student Aid, either by mailing in a printed copy or submitting the application online. The FAFSA gathers several pieces of personal information about the student as well as his or her parents or guardians, including income, resident status, and the school he or she plans to attend. Once the FAFSA is submitted, it is reviewed so the amount and type of federal student loans offered to the student can be determined. It is always suggested that students start with the FAFSA to determine their eligibility for federal student loans before they search for student loans through private lenders.
Breaking Down Mortgages
Just like the rising cost of higher education requires borrowing, purchasing a home is not typically done without the help of a bank or other financial institution by way of a mortgage loan.
What is a Mortgage?
A mortgage is a type of installment debt offered to qualified borrowers in their pursuit of buying a home. Banks, credit unions, online, and other lenders are likely to offer mortgages to individuals who have a strong track record of payment history and debt management, steady income, and the means to pay for the ongoing expenses associated with home ownership over a long period. Mortgage loans are large lump sums used to finance a home purchase, typically over a 15 or 30-year timeframe. A mortgage requires fixed monthly payments over time that includes principal, the original amount borrowed, and interest, the cost of borrowing.
How Does a Mortgage Work?
The purpose of getting a mortgage is to buy a home, and ultimately that property is used to secure the debt. Should a borrower fail to make payments on the mortgage loan as agreed, the bank can reclaim the home as its own and sell it to cover lost revenue from the original mortgage loan. Mortgages often come with lower interest rates than other types of installment debt because they are secured by real estate.
The typical repayment term of a mortgage is 30 years, but some financial institutions offer mortgage repayment plans for five, ten, 15, 20, or 25 years. Borrowers who opt for a shorter repayment term pay more on a monthly basis, but they may pay less over the life of the mortgage loan because interest has less time to accrue. To make homeownership affordable, however, many homebuyers select a 30-year repayment term at the time a home is purchased. Regardless of the repayment term chosen, taking on a mortgage is a substantial risk. If a borrower is unable to pay the scheduled monthly payment they could lose their home to the bank, have a tarnished credit history and score, and find it difficult to get affordable housing in the future.
How Do You Manage a Mortgage?
Financial institutions offering mortgage loans make it relatively easy to manage repayment over time. Borrowers have the option of paying the minimum principal and interest payment, or they can elect to pay an additional amount toward the principal balance on a monthly or an unscheduled basis. Paying down a mortgage in a shorter period helps homeowners save on the total cost of borrowing, which can be significant over the course of a 30-year repayment term. Most lenders also allow bi-weekly (every two weeks) payments available either online or via check or phone transaction, which can help expedite the payoff of a mortgage over time.
Borrowers who want to reset the clock on their mortgage balance may qualify for a refinance. Refinancing a mortgage is the process of taking out a new mortgage loan to pay off the remaining balance of the original loan. This accomplishes two tasks: potentially reducing the interest rate and lowering the monthly payment. Borrowers considering a refinance of a mortgage should consider all the costs associated with the process before pulling the trigger.
How Do You Get a Mortgage?
Individuals interested in purchasing a home must apply to a mortgage lender – a bank, credit union, online, or other lender. The application requires information about the borrower, including income and employment, assets and liabilities, and a check of credit to show payment history and other debt obligations.
Mortgage lenders often have a minimum credit score requirement that must be met to qualify for a mortgage loan, as well as a debt-to-income ratio limit. This means borrowers cannot have a high monthly payment obligation to other creditors, as this indicates affording a monthly mortgage payment over time could be a challenge. Mortgage lenders may require proof of savings and checking account balances, income and employment verification, and an appraisal of the home being considered for purchase to approve a new mortgage loan application.
Another type of debt a millennial may use to help pay for large expenses is a personal loan. Unlike student loans, credit cards, and mortgages, personal loans can be used for whatever the borrower deems necessary, and they may be secured or unsecured.
What is a Personal Loan?
Various financial institutions offer personal loans to consumers without the need for collateral. As installment debt, a personal loan is offered as a lump sum of money paid to the borrower who then repays the full principal balance plus interest over time. Personal loans usually come with fixed monthly payments and fixed interest rates, which makes financing large purchases more predictable than a revolving credit account.
What is the Point of a Personal Loan?
Although personal loans may be used for a variety of purposes, like financing a major purchase or getting cash on hand when monthly cash flow is tight, most millennials utilize personal loans for debt consolidation. Using a personal loan for debt consolidation involves taking out a single, large one-time loan to pay off other debt balances, like credit cards. Typically, personal loans carry a lower interest rate than credit card accounts, making it more affordable to repay debt owed over time.
How Do You Manage a Personal Loan?
Most personal loans come with a relatively short repayment term, ranging from six months up to five years. The benefit of using a personal loan for major expenses or debt consolidation is that the repayment is fixed, as is the interest rate, offering predictability and ease of budgeting for borrowers. Personal loans require a monthly payment for as long as the loan balance remains, and some lenders offer the ability to pay more than the fixed payment due so the loan may be paid down faster.
How Do You Get a Personal Loan?
Traditionally, most individuals received a personal loan by applying with a bank or credit union. The financial institution reviews the individual’s credit history and in some cases income and employment to ensure the monthly payments are affordable for the borrower. In recent years, several online lenders have made the process of shopping for and obtaining a personal loan easier. Instead of walking into a bank or credit union branch, borrowers can simply complete a brief application online and receive approval or denial of a personal loan application in a matter of moments. The funds for an approved personal loan are then transferred to the borrower’s bank account.
While debt is an integral facet of millennial money management, there are other aspects of personal finance that play a crucial role. Employer benefits are made available as part of a compensation package to employees of companies both large and small, and understanding some of the most common benefits is helpful in managing one’s financial life.
What are Employer Benefits?
Employees of certain companies are offered benefits directly from the employer, either paid for by the company or at a lower cost than they may be available out in the open market. Employer benefits can add up to a significant portion of an employee’s compensation over their career, and they come in a variety of forms. The most common employer benefits include retirement plans, healthcare benefits, paid time off, student loan benefits, and insurance products.
What are Retirement Benefits?
Employers often offer access to an employer-sponsored retirement plan to employees who meet certain criteria, like working full-time or meeting a minimum of hours worked for the employer. An employer-sponsored retirement plan can come in several different forms, including a 401(k), a thrift savings plan, a 403(b), or a SIMPLE IRA. Each plan provides employees the chance to contribute on a pre-tax basis through paycheck deferrals, up to annual limits, and the funds are then invested. Once in the retirement account, contributions and investment earnings are tax-deferred, although they may be taxable once withdrawn in retirement. Retirement benefits offered through an employer are a smart way to save for the long-term, especially for millennials who are just getting started in the workforce.
What are Common Healthcare Benefits?
Employers may also offer healthcare benefits to employees, including access to group health insurance, flexible spending accounts, and health savings accounts. The most common healthcare benefit is health insurance which the employer may help offset the cost of coverage for eligible employees and certain family members of employees. Obtaining health insurance through work is often a cost-saving tool for millennials when employers offer a subsidy or offset to the premium amount due.
What is Paid Time Off?
Employers may also offer paid time off as an employee benefit, which is simply the ability to accrue sick days or vacation days over time. Employers offer paid time off at a varying rate, but this benefit can add up to a significant amount when used correctly.
What Are Student Loan Benefits?
In recent years some employers have started offering student loan benefits to employees who meet certain criteria. Student loan benefits from an employer may mean all or a portion of required student loan payments are taken care of by the employer, as opposed to the employee. For millennials with potentially tens of thousands of dollars in student loan debt, this employer benefit can be a life-changing perk to working with a company that offers it.
What Are Other Common Benefits?
Employers may also offer benefits like disability insurance, life insurance, long-term care insurance, dental, or vision insurance at a discounted rate for employees. These benefits can work to an employee’s advantage if they are unable to obtain these coverages at a lower cost outside of their employer.
Taxes (in the United States)
What Are Taxes?
In managing money as an adult, millennials also need to be aware that taxes play a role in how much of their earnings they can keep and use for spending or paying debts and other bills. Taxes are imposed by both the federal government and states, and they are used to fund social benefits made available to the masses. There are income taxes, sales taxes, and property taxes that may impact millennials as they manage their financial lives.
What are the Most Common Taxes?
Income taxes have the greatest impact on millennials in the United States, as they are required payments to state and federal governments as a percentage of earnings. Sales taxes are charged on goods and services sold in certain states, while property taxes are assessed by cities and counties on possessions, like a home or a vehicle.
How Do Taxes Work in the United States?
Taxes on income are kept from an employee’s paycheck each pay period, based on that individual’s withholding status. Several tax brackets are applied to individual earners in the United States, ranging from ten percent up to 39.6 percent, and those who earn higher incomes pay a higher percentage of their earnings for income tax purposes.* If the tax withholding is not enough throughout the year, an individual may owe taxes when they file for that calendar year. Conversely, if too high an amount was withheld, an individual receives a tax refund.
*This may change soon with if President Trump’s new tax plan passes.
How Do You File Your Taxes?
Individuals file taxes each year during tax season, which begins in January and runs through April 15. People who earned an income from the previous year receive documentation showing how much money was paid through employer withholding or other means throughout the year, then that information is transferred to tax filing forms and submitted to the Internal Revenue Service (IRS) for verification. Individuals have the option of printing forms directly from the IRS and completing them on their own by hand, working with a tax professional, or utilizing tax software to complete the process and submit it online.
Millennials have a lot to think about when it comes to managing their financial lives, including how to track and pay bills.
What Are Bills?
Simply put, bills are notifications of money owed, to a lender, a creditor, or another company from which someone received a product or service.
What are Some Common Bills to Pay?
Bills come in a variety of forms, but the most common include debt obligations, utilities, and housing payments. For instance, an individual may receive a bill for a student loan, requiring a minimum payment be submitted by a specified date. Similarly, a utility company like a gas or electricity provider will send a bill for energy used in the last billing cycle (typically one month) that the individual is required to pay by the due date.
How Do You Pay Bills?
Paying bills is a crucial part of being a millennial adult, regardless of where the bill originates or when it is due. To manage bill payment successfully, individuals need to be aware of what they owe and to whom, and when the minimum amount accepted is to be paid. Most companies or financial institutions that send bills to consumers do so via e-mail or printed statements that show how much is needed to satisfy the bill and by when a payment must be received.
Millennials can make these payments by sending a check, transferring money to the company online, or calling to make a payment over the phone. It is important to understand that bills not paid by the due date may incur a late payment fee which, when done consistently over time, can add up to a significant amount.