by Rich Wesselt, Founder and Principal, Wesselt Capital Group
If you are a millennial, you are certainly at a key point in your life when it comes to financial planning.
Currently, members of the millennial generation are between the ages of 22 and 38. That means some of them have just started their first job after college, while others are established in their careers and starting families.
No matter what end of the generation you are on, this is a time for financial decisions that will affect the rest of your life—and few decisions are more important that planning your financial future.
A report last year said 53 percent of millennials expect to become millionaires in their lives, if they haven’t already. That is a lofty goal. The same report found millennials put away an average of $480 per month into retirement savings, though 37 percent don’t save for retirement at all. Also, 49 percent spent more on dining out each month than they put toward retirement, and 27 percent spent more on coffee alone.
From this report, as well as from what I have seen during my years as a financial advisor, there are three common mistakes people in this age group make when it comes to financial planning. Those mistakes aren’t unique to the millennial generation—which is good news for them. That means we can borrow three lessons learned from previous generations so millennials can make smarter choices.
Problem 1: You don’t have a plan.
First, few young people have a financial plan. That means many do not have plans to save a specific amount of money with an end goal in sight. And that plan often does not include a savings target based on income and insurance tools.
Instead, set specific savings targets based on your current income and age, and then use proper life insurance policies as part of your plan. As I mentioned in my last article, the goal should be to save 15 percent of your net income. Savings discipline is the bedrock of any financial plan.
Problem 2: Have a plan? It may be unrealistic.
Second, if Millennials are planning, rarely do they plan for as much income as they will need at retirement. They do not use a formula that takes into account their current age, income and “human life value,” which is an approach to planning life insurance needs.
Base your savings goal on your human life value. For example, if you are in your thirties and make $100,000 annually, then you should be saving enough to end up with 30 times your annual earnings, or $3 million. If you are in your 40s, it is 20 times your annual earnings.
Problem 3: You’re underinsured.
Third, Millennials are underserved by insurance, particularly life insurance. The reason is too many people do not have whole life insurance, relying instead on a term life insurance policy, which expires at the end of the term—meaning it expires when you get to a designated age.
Choose whole life insurance. It is often more expensive than term, but it has many advantages. Beyond providing a permanent death benefit that does not expire when you reach a certain age, it earns for you, so you can build the cash benefit over time with safe, secure returns. It is another form of disciplined savings. And it provides additional financial security because it can be used as collateral for bank loans and allows you to borrow against it if you ever face a difficult situation.
In future articles, I’ll explore how to plan around your human life value and why whole life insurance is the best choice. In the meantime, call our office if you have any questions—we’re happy to help you get up to speed: 610-650-1840.