According to several personal finance experts on monetary issues of millennials, there are times when these young adults have to face ‘ifs and buts’ regarding the most apt financial decisions to make. Their dilemma makes the entire decision-making process a lot difficult for them than it is otherwise.
Financial choices millennials should make
Here are some of the financial decisions millennials can make and their implications on their personal life:
- Debt repayment or savings – The straightforward answer to this dilemma would be to have an emergency financial cushion first. After that, everything depends on the circumstance you are in. Basically, paying off compounding interest rate debt would in a way translate into a return on investment from the market.The task of prioritizing your debts over one another will solely be dictated by your present personal financial health, considering that you have got an emergency fund for yourself. This emergency fund should have at least 3 – 6 months’ worth of your living costs.So, personal finance experts suggest that the decision to pay off your debts against investing all those extra cash at hand should depend on the rate of interest charged on the credit versus the possible rate of return from investing in the market.
- 401k or Roth IRA – Probably both, provided there isn’t any strings attached to them. However, in case of a crisis, then opt for the 401(k) first that matches with that of your employer. Essentially, 401k is an employer-sponsored retirement savings option. It allows you to contribute towards it on a pre-tax-basis and grows as a tax-deferred retirement income. However, you’d have to pay taxes once you start withdrawing the funds after retirement.Alternatively, you can open a Roth IRA (Individual Retirement Account) on your own, with the taxed dollars. Whatever income it generates would be considered as tax free, provided you plan to use them for retirement. More, you can withdraw all your original contributions without attracting any penalty or interest.As of 2013, you are permitted to contribute not more than $5,500 to a Roth IRA, considering your adjusted gross income is less than $112,000 as a single person or $178,000 if you are married. However, if your annual income is more than that, then the amount of contributions that you can make would decrease. Furthermore, you can’t make any contribution, if your annual income is above $127,000 as a single person or $188,000 as a couple. Finally, the best thing to do in this regard is to opt for both.
- Buy or rent – As per the popular notion, it is better to opt for rented homes. Still, you should do what is most suitable for you. Actually, there isn’t any one-size-fits-all solution for this. However, do whatever deems fit for you and stay away from replicating what others have done.It may have worked for them, but that doesn’t imply that the same would do in your case. Never give into peer-pressure of buying a home. It was considered as the American dream for the baby boomers and olders, but it isn’t for millennials like you now.Here, being flexible with your choice will what get you better results. Ask yourself, how long am I going to stay put in this area? You’re probably lost at that. So, it is best to keep yourself available to that job offer you’ve yearned for all these years and not to tie yourself to one particular place.
Personal finance experts have opined that the current generation of millennials like you have figured out that homeownership shouldn’t be a part of the American Dream. These financial gurus propagate the need of being flexible while you have a better job and till the time you need it.
This post was featured on the Carnival of Financial Camaraderie, Aspiring Blogger, Prairiee ECo-Thrifter, thank you!
The buy or rent debate is very different depending on your location. Where I’m from, rental prices are normally more than mortgage payments by a good bit, so it’s hard to justify renting if you’re going to stay here more than a few years.
Same where I live for the most part. It’s quite a bit cheaper to buy a small starter home than to rent one. And, that’s why I own rental homes!
We’re in the same boat. We are going through the process of buying our first home. Eventually this home will become a rental.
All three of these are big choices that millennials have to make. You could throw in “get advanced degree or not get advanced degree” as that is a choice most people have to make in their 20s or early 30s.
It’s clearly not easy being an adult now, but these choices have to be made. Together with careful budgeting and living below your means.
I would agree with the others on the rent vs. buy debate. I think it’s a bit relative depending on where you live. In our area, you can get a mortgage for the same as many will rent for. If you have some cash for a down payment, then buying can be a great option.
When people look at the buy vs. rent comparisons here in the comments, I hope they factor in ALL of the costs of owning. That includes the closing costs when purchasing, more closing costs when selling, as well as ongoing insurance and maintenance costs. And that doesn’t even factor in the cost of getting new furniture and other stuff when you buy a home. Those things are a much smaller issue when renting. You can’t just compare the monthly mortgage payment to the monthly rent check.
I love that you emphasize the importance of assessing your current situation and circumstances before deciding whether to rent or buy. Buying isn’t always the best option, especially for millennials who are constantly transitioning in the first few years of their professional lives.
I don’t have to choose between debt repayment or savings, because I don’t have debt (woohoo!) but we own our home and rent out the basement suite. It works really well for us. WE don’t have ROTH or 401K here, but we have similar accounts that use different names, and I have both – AND a pension!
I agree with DC that you could easily add “think really hard about whether you need that advanced degree or not” to the list. Advanced degrees can be awfully spendy and it’s important to think about employment prospects when you’re done. It’s a decision that can have a massive impact on finances, especially if you take out loans!
I completely agree with the idea of renting early on. It’s often the right decision and matches the flexibility that young workers may require as they are faced with wholesale career changes, promotions, job opportunities in other cities, etc…
A home is an anchor as it relates to mobility. And mobility is often key in chasing the best income opportunities.
I’m also a big proponent of renting when you’re young. I guess it might be different depending on where you live, but for a young person who doesn’t know where their career, life is going to take them, and who is not financially stable, owning a home can be an anchor as Done By Forty said. Homeownership comes with many hidden expenses that many fail to mention.
I’m a huge advocate of having a home that you’ve paid off by the time you are retired (or, alternatively, save enough money so that you can buy a small home outright by the time you retire, without jeopardizing your retirement savings). Although I suppose this is not a decision you have to make when you are in your twenties or even thirties…
If you want to retire you need to have a paid off home, otherwise your housing costs will go up in perpetuity. Renting makes sense in an expensive area.
I’m a big believer in renting as long as one can to save for a down payment, especially if you’re in an area where home prices are outrageous. I think there’s too strong of a push for homeownership for folks who some aren’t really cut out for it. Although after a few years my sister is doing ok with her house, her first couple of years of homeownership sent her into credit card debt that she is still paying off today. Home ownership is a serious commitment and shouldn’t be taken lightly.
Never give into peer-pressure of buying a home. I totally agree with that one. It totally depends on where you live, what your income is, etc. There is no one size fits all anymore, just as people are choosing not to get married, have babies, etc.
Hmm, I’m in the debt/Roth IRA/rent category. My debt load is large and I want to wipe it out as quickly as possible, I’m self employed and a Roth IRA is the easiest option, and I don’t know where I want to live long-term. Renting is awesome anyways for those of us who don’t have maintenance skills 🙂
It’s much more expensive to buy a place in Canada then to rent them and I think that it’s probably depending on the city you live in
Pauline, I liked how you stressed the “it depends” part of financial decision making. It’s true that many of the decisions that we need to make concerning our finances need to be tailored to our individual circumstances. This should be applied whether we are deciding to rent or buy or use our savings to pay off our student loans. Nice post!