A Millennials' Guide to Financial Capability

Millennials have their financial work cut out for them. Compared to older generations, America's younger adults (those aged 18 - 34) are more financially vulnerable and face greater financial challenges. That's the less-than-rosy picture painted by findings from the National Financial Capability Study (NFCS), released in July by the FINRA Investor Education Foundation (FINRA Foundation).

Businesswoman in Train Station
Making ends meet
requires bringing
income and expenses
into line.

If you're a millennial, the data is fairly downbeat across the four areas the NFCS examined, from making ends meet and planning ahead, to managing financial products and displaying competent levels of financial knowledge and decision-making. The good news is that you have time on your side to lay the foundation for future financial well-being. By adopting the right financial habits now (see our suggestions below), you can prepare for the financial challenges—and opportunities—you'll face down the road.

1. Making Ends Meet. When it comes to balancing the books, millennials struggle in comparison to other generations. While 14 percent of those aged 55+ (baby boomers) and 18 percent of those aged 35 - 54 (generation X) came up short in their personal budgets—statistics that themselves are cause for concern—22 percent of millennials spent more than the income they earned. The NFCS data show that the strain of an unbalanced budget has a material impact on individual well-being. Thirty-six percent of millennials say they had “medical cost difficulties,” meaning they avoided some kind of medical service (visiting a doctor, following through with a doctor's recommendation and filling a prescription) because of cost concerns. This compares to 30 percent of 35 - 54 year olds and 18 percent of those 55 and older.

What you can do: Making ends meet requires bringing income and expenses into line. To start, calculate your current monthly income and expenses. Then, create a personal or household budget that adjusts your current levels of spending to achieve a positive cash flow. The goal is to spend less than you make each month. Make sure to include a monthly line item for your contribution to an emergency fund—a savings account set aside exclusively for unexpected though urgent costs, such as medical bills or a car repair. That way, you'll be better able to shoulder those costs when they arise. 

2. Planning Ahead. Millennials have a long financial life ahead of them. Yet the NFCS found that they are not making future preparations now. In fact, the data show that millennials are shying away from long-term financial planning. Only 17 percent of millennials indicated that a period of five years or greater was most important to them when it comes to planning ahead for savings and budgeting. This compares to 28 percent of generation Xers and an encouraging 35 percent of baby boomers. It should come as no surprise, then, that 48 percent of millennials do not have a retirement account, compared to 32 percent of generation Xers. Without clear long-term goals—combined with a strategy for achieving these goals—millennials risk being unprepared financially down the road.

What you can do: Retirement is well in your future, but saving for retirement needs to be built into your present financial activities. Beginning retirement saving early allows you to take full advantage of compound interest, the multiplier that allows your money to grow over time. In addition, retirement savings options such as 401(k)s and IRAs have tax incentives, and employers may also offer a company match, in addition to money put into a retirement savings plan by the employee. An online retirement calculator can help you estimate how much to save each year to accumulate enough money for your projected retirement.

3. Managing Financial Products. When it comes to managing credit cards and other financial products, millennials struggle. Not surprisingly, student debt, which is highly correlated with age, is highest among millennials, with 45 percent who have a student loan. Further, more than baby boomers (24 percent) and generation X (44 percent), millennials (52 percent) engage in expensive credit card behaviors—and only 50 percent of millennial respondents rate their credit as good/very good.  Millennials are also more likely to use high-interest non-bank borrowing vehicles, such as payday loans. In fact, 38 percent of millennials have used these products, compared to 27 percent of Gen Xers and just 13 percent of baby boomers.

What you can do: Managing debt, including student loans starts with making and sticking to a budget. But it also involves prioritizing your debt. Few money-management strategies pay off as well as, or with less risk than, paying off all of your high interest debt. If you can't pay off credit card debt immediately, work out a structured plan to pay off the balance as quickly as possible. You'll save money in the long run. Save up for big purchases, and, as we mentioned above, create an emergency fund to avoid expensive borrowing if—or rather, when—an unanticipated emergency arises.

4. Financial Knowledge and Decision-Making. On a six-question quiz designed to assess participants' understanding of fundamental concepts of financial literacy—including bond pricing, risk, inflation and interest rates—the average score was a barely passable 3.2. Digging deeper, millennials once again lagged older generations, answering correctly an average of only 2.6 questions out of six. By comparison, G Xers scored 3.2 out of 6 and baby boomers scored 3.6 out of 6; millennials have a long way to go.

What you can do: Take advantage of financial education opportunities offered at schools or through work, and be proactive in seeking out financial knowledge yourself, online or in financial publications. As far as subject matter, a good place to start is the NFCS quiz. Don't worry if you don't ace every question. You'll learn a lot from the explanations that are provided with your score.

So take heart, millennials. The tips above, along with the many years ahead that you have to save and invest, should go a long way toward improving your financial capability.